Question

1. The market for bottled water can be described with supply and demand functions as follows

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1. Algebraically find the equilibrium price and quantity for this market.

Now suppose that an investigative journalist discovers that companies were bottling tap water and selling it at a huge markup. The government passes a law prohibiting companies from bottling tap water, and the supply of bottled water changes to:

2. Algebraically find the new equilibrium price and quantity for this market.
3. Draw a graph of the supply and demand in this market before and after the government regulation went into effect.
4. Compute the change in consumer and producer surplus due to the new law.
5. Bonus: What is the effect on consumer welfare if everybody who decides not to buy a bottle of water at the new price instead gets a glass of tap water (Price: $0.00)?

Answer 1

Od -100P1150 P -0.01Qd 11.5 Qs 400P 100 P 0.0025Qs 0.25 Finding market equilibrium price and quantity by equating demand and supply functions: Od Qs www -100P1150 400P 100 P 2.5

By substituting the value of P, Od -100P1150 Od -100*2.5 1150 Qd 900 = Thus, the equilibrium price is $2.5 and quantity is 900 When the supply changes (Qs 400P 350) with constant demand, Od Qs = -100P 1150400P - 350 P 3 By substituting the value of P, Od -100P1150 Od -100*31150 Od 850 = www Thus, the new equilibrium price is $3 and quantity is 850. b.

Graph: Price 11.5 2.5 0.875 0.25 850 900 Quantity Calculation of consumer surplus and producer surplus before change in supply:

CS 0.5*height*base CS 0.5*(11.5 2.5)*(900) CS 4050 PS 0.5*(2.5 0.25)*900 PS 1012.5 TS CS PS TS 40501012.5 TS 5062.5 Calculation of consumer surplus and producer surplus after change in supply: CS 0.5*(11.5-3)*850 CS 3612.5 PS 0.5*(3 0.875)*850 PS 903.125 TS 3612.5 903.125 TS 4515.625 =

Thus, the change in consumer surplus is (4050 3612.5 437.5) and the change in producer surplus is (1012.5 903.125 109.375)