Question

Suppose that the demand for lawn fertilizer can be expressed as QD = 5000 - 120P and that the supply of lawn fertilizer can be expressed as QS = 1000 + 80P where Q is measured in tons per year and P is measured in dollars per ton. What is the effect of a government-imposed price ceiling of $20 per ton of fertilizer?

A surplus of 2,000 tons.

A shortage of 1,200 tons.

A surplus of 1,200 tons.

None of the above

Answer 1

ANSWER: NONE OF THE ABOVE

QD=5000-120P

when P=0

QD=5000, horizontal intercept of demand curve

When QD=0, P=41.6

QS=1000+80P

when P=0, QS=1000, horizontal intercept

when Qs=0 P=-12.5

price S1 D P 20 E D 1000 2600 Quantity -12.5 S

price ceiling is imposed by government to protect consumer from producers charging higher prices. It is usually set below equilibrium price. So that government can deter producers from charging higher market determined price. In the figure above market determined price is 20 and quantity is 2600. When charging $20 producer surplus is equal to the area SEP. here price ceiling and market determined price is same. So the producer surplus does not change