Question

The graph accompanying this question show the market for gadgets. The government is considering intervening in this market. 

a) Calculate the producer surplus at the market equilibrium price and quantity. Show your work. 

b) If the government imposes a price ceiling at $24, is there a shortage, surplus, or neither? Explain. 

c) If instead the government imposes a price floor at $28, is there a shortage, surplus, or neither? Explain. 

d) If instead the government restricts market output to 14 units, calculate the deadweight loss. Show your work. 

e) Assume the price decreases from $20 to $16. 

  i) Calculate the price elasticity of demand. Show your work. 

  ii) In this price range, is demand perfectly elastic, relatively inelastic, or perfectly elastic, relatively elastic, unit inelastic?

Answer 1