Use the following supply and demand equations.
Supply:p= 4 + 3q.
Demand:p= 2,132−q.
Use these equations to respond to the following questions.
(a) What is the market equilibrium?
(b) Under the market equilibrium, what is Total Surplus?
(c) Suppose the government enacts a price ceiling of ̄p= 2,000. What is ProducerSurplus, Consumer Surplus, Total Surplus, and Deadweight Loss?
(d) Instead, suppose that the government enacts a price ceiling of ̄p= 1,100. What is Producer Surplus, Consumer Surplus, Total Surplus, and Deadweight Loss?
(e) Under a price ceiling of ̄p= 2,000, what is the Shortage? What if ̄p= 1,100?
(a) The market equilibrium would be where the supply price would be equal to demand price, ie or or , and for , we have or , which are the required equilibrium quantity and price.
(b) The graph is as below.
The total surplus is the area of the triangle ACE, which is or or dollars.
(c) In case of a price ceiling of , the market equilibrium would not change. The reason being that the price ceiling of would be non-binding or ineffective price ceiling, as the price ceiling of means that more than $2000 price can not be charged in the market, and the market equilibrium is already lower than the price ceiling.
The producer surplus would be the area of triangle BCE, which is or or dollars.
The consumer surplus would be the area of triangle ABE, which is or or dollars.
The total surplus would be the area of PS and CS, ie or dollars, which is the same as before.
There is no dead-weight loss, since the price ceiling does not affect the market equilibrium.
(d) A price ceiling of would be effective since it is below the market equilibrium. At this price, the quantity demanded is more than the quantity supplied. The quantity supplied would be as or , which would be the equilibrium quantity supplied, and traded. The graph is as below.
The PS would be the area of triangle CBH, which is or or dollars.
The CS would be the area of region ABHG, which is the area of triangle AFG and area of rectangle FBHG, ie or (since at point F, p=1766.6667) or dollars.
The total surplus would be the sum of PS and CS, ie or or dollars.
The dead-weight loss would be the difference between the old TS and the new TS, which is dollars, which is also the area of triangle GHE.
(e) Under the price ceiling of , there is no shortage since the price ceiling is above the market equilibrium.
If price ceiling is , the quantity supplied is , while the quantity demanded would be as or . The shortage in this case would hence be units, which is the demand not met by the supply due to the price ceiling.
Use the following supply and demand equations. Supply:p= 4 + 3q. Demand:p= 2,132−q. Use these equations to respond to th...
Use the following supply and demand equations. Supply:p= 4 + 3q. Demand:p= 2,132−q. Use these equations to respond to the following questions. (a) What is the market equilibrium? (b) Under the market equilibrium, what is Total Surplus? (c) Suppose the government enacts a price ceiling of ̄p= 2,000. What is ProducerSurplus, Consumer Surplus, Total Surplus, and Deadweight Loss? (d) Instead, suppose that the government enacts a price ceiling of ̄p= 1,100. What is Producer Surplus, Consumer Surplus, Total Surplus, and...
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