Question

Question 2. Consider the market for burritos in a hypothetical Canadian city, blessed with thousands of students and dozens of small burritos stands. The demand and supply schedules are shown in the table.

Price ($)

Quantity Demanded (Burritos)

Quantity Supplied (Burritos)

0.0

500

125

1.0

400

175

1.50

350

200

2.00

300

225

2.50

250

250

3.00

200

275

3.50

150

300

4.00

100

325

5.00

0

375

a) Graph the demand and supply curves. What is the free -market equilibrium in this market?

b) What is the total economic surplus in this market in the free-market equilibrium? What area in your diagram represents this economic surplus?

c) Suppose the local government, out of concern for the students' welfare, enforces a price ceiling on burritos at the price of $1.50. Show in your diagram the effect on price and quantity exchanged.

d) Are students better off as a result of this policy? Explain.

e) What happens to overall economic surplus in this marker as a result of the price ceiling? Show this in the diagram.

Questions 1. Consider the marker for some product X that is represented in the demand-and-supply diagram.

a. Suppose the government decides to impose a price floor at P1. Describe how this affects price, quantity and marker efficiency.

b. Suppose the government decides to impose a price floor at P2. Describe how this affects price, quantity and marker efficiency.

c. Suppose the government decides to impose a price ceiling at P1. Describe how this affects price, quantity and marker efficiency.

d. Suppose the government decides to impose a price ceiling at P2. Describe how this affects price, quantity and marker efficiency.

Answer 1

a.) From the graph, free market equilibrium is at $2.50 price and quantity is 250 thousands of burritos.
Price . 10. 200 Q 3oo 400 500 Quantity from graph p* - $ 2.50 - Q* = 250 thousands of burritos. 6 Part I and I represents total economie Surplus in the market. TES = Area (I + o) = (4x 2.5*250) +2-5X259) > (1x 2.5X1257 = $ 781.250

price Price ceiling 100 200 300 350 400 500 • Quantity Shortage & As a prices hoor But in result of price Ceilings, go down & will help students to afford bussi to 8. there will be a Shostage supply as well.

Now area producer traws ferred Students. ® which was earlier suaplus of burritos stands from stands to O deadweight But there willl be a lors on area (B+C).