Question

Problem 8. Let D(p) = 40 - p be the demand function and S(p) = 10 +p be the supply function. (a) Draw these functions on a graph. (b) What are the equilibrium price and the equilibrium quantity? (c) Suppose the government does not allow selling more than 20 units of output. At what price would 20 units of output be demanded? (d) How many units of output will be supplied at the price in (c)? (e) At what price would sellers supply only 20 units? (f) Suppose the government wants to make sure that (a) only 20 units of output are bought and (b) suppliers receive no more than the minimum price at which 20 units of output are supplied. One way to achieve this is to issue 20 ration coupons. Under this arrangement, any consumer who wants to buy a unit of output has to present one of the 20 coupons along with the necessary amount of money to buy the good. If the ration coupons are freely traded on the open market, what would be the equilibrium price of these coupons? (g) On the graph, shade the area of the deadweight loss from restricting the supply of output at 20 units. (h) What is the size of the deadweight loss?

Answer 1

(8) o | Go DCP) = youp Q =yorp a yo o s(P) = 10+P Q = 10 +P sed - --- IS - - - - - - o s 10 is 20 25 30 35 no us So ss Quantity (6) Equilibrium price = $15 - quantity = as units. (c) gf hout does not allow selling more than 20 units of output. At price $20, 20 unit will be demanded, (d) At price $20, 30 unit will be demanded.