Question

Problem Setup

Analyze the following three scenarios (A, B, and C) describing the market for widgets. Think of Scenario A as the baseline situation, with B and C representing possible changes in the market.

Scenario A ● The market (aggregate) demand for widgets is P = 100 – 4Q, where Q is the quantity of widgets demanded. ● The market (aggregate) supply of widgets is P = 10 + 5Q, where Q is the quantity of widgets supplied.

Scenario B ● Market demand remains the same as in scenario A (P = 100 – 4Q). ● Market supply increases to P = 10 + 2Q.

Scenario C ● Market demand increases to P = 130 – Q. ● Market supply remains the same as in situation A (P = 10 + 5Q).

Questions:

For each scenario described above, find the equilibrium and answer the following questions about that equilibrium outcome. You will likely find drawing appropriate diagrams to be helpful.

 What quantity (Q) will be produced and consumed?

 What will be the market price (P)?

 What is the total paid (TP) by consumers?

 What is the total benefit (TB) to consumers?

 What is the consumer surplus (CS)?

 What is the total revenue (TR) received by producers?

 What is the total variable cost (TVC) incurred by producers?

 What is the producer surplus (PS)?

 What is the joint surplus (JS)

Answer 1