Question

This assignment asks you to solve for equilibrium in a market and then look at the impact of a price ceiling, a price floor and a tax. The correct answers to these questions will vary across students. This is because the numerical values of some parameters are dependent on your student members. Suppose supply and demand for pizza are given by: Q" = 110 - OP QS = BP If the last digit of your student number is not 0, set a (pronounced alpha) equal to this digit. For example, if the last digit of your student number is 3, then a = 3. If the last digit of your student number is 0, then set a = 10. If the 8th digit of your student number is not 0, set B (pronounced beta) equal to this digit. If the 8th digit of your student number is 0, set 8 = 10. Questions 1. Competitive Equilibrium. In this question you solve for the competitive equilibrium in the market for pizza. (a) Solve for the equilibrium price and quantity of pizza. (b) Rewrite the demand curve as the inverse demand curve, that is P = .... and plot this along with the supply curve. Indicate the equilibrium price and quantity, as well as the areas which represent consumer and producer surplus. (c) Calculate the amount of producer and consumer surplus at this equilibrium. 2. Price Floor. Suppose that the government imposes a price floor equal to pf = 25. (a) Is this price floor binding in your market for pizza? Carefully explain how you came to your answer. (b) What will be the market pice and quantity of pizza following the imposition of this price floor? (c) Draw a supply and demand diagram and indicate the market price and quantity, as well as the areas which represent consumer and producer surplus. (d) Is there a shortage or a surplus for pizza under this price floor? If so calculate the amount of this shortage or surplus. (e) Calculate the amount of producer and consumer surplus at this outcome.

$\aa =1$

$\ss =7$

Answer 1

1l(a) Qd = 110-P Q = 7P At equilibrium - Qdl=gs or 110-P - 7P W or 110 = 8P or 110 =P = $13.75 o = 7 x 13.75 = 96.25 1 (6) The demand come- P=110- Qd

CP 110- Qd P = QS al 7 # n Price # # 13.75 TITTI:e.s WARS lid and gly 96. 25 At eque librium, to od=85 the area below the demand corne and above the price line is the consumer sloplus. The area abone the supply curve and below the price line is the produer surplus 2018

1c) C.S = 4(10 - 13.75)x 96.255 = 46 32.03 P.S = 1(13.75-0 x 96.25 = 661.7187. 2 Price is the price lenel below which price can't floor. given price floor = P = 825 But équilibrium price floor is $13.75. as Therefore, the price floor is binding It does not allowe market prices to fall below $25 even though the equilibrium price is $130.75 . 2018

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