Question

1. Consider a perfectly competitive market where the mar- ket demand curve is given by Q = 92-8P and the market supply curve is given by Q = -4 + 4P. In each of the following situations (a-e), determine the following items (i-viii) i) The quantity sold in the market. ii) The price that consumers pay (before all taxes/subsidies). iii) The price that producers receive (after all taxes/subsidies). iv) The range of possible consumer surplus values. v) The range of possible producer surplus values. vi) The government receipts. vii) The net benefit. viii) The range of deadweight loss. (a) A market with no intervention. (b) A market with tax T = 3. (c) A market with subsidy. S = 6., (d) A market with price ceiling C= 2. (e) A market with price floor F= 9.

Answer 1

Date Answer af Amal a A market with no intervention Demand curre: 8 = 92 8P Supply curve : 8 = - 4+4P " Quantity sold in the market on a perfectly competitive market, equilibrium I is achieved when demand is equal to supply and both tums and consumers are Duci takers equations, we get hence, solving the two Q- 92 - 8p Lo=-4 +4px = P = (8+4)/4 =) 0 - 8 A8R we get substituting the vaker of P in demand curve, 8. 92 - 8 (814] Q = 92-28-8 30 = 92-8 4 38 = 84 Q: 84 28 Quantity sold in the market is 28 units.

Prices paid by consumers Q = 92-8P substilelting 8=28, we get 28= 92-8p :9 8P = 92-28 - 8P - 64 P = 88 Prices that consumers pay is $8. in The prices recewed by producers & Q2-4+4P. Q = 28, we get substluting 282 -4+4P

Page 'No. Date 32=4P L P 288 The prices are received by producers is $8 since it is a perfectly competitive market with no market intervention, both consumes and produces are paying and resoweng the same price, respectively iul Consumer surplus is defined as the difference between consumers willingness to pay and the how much they actually pay. In the given problem, wroumen semplus it given by the area under demand curre and the peice line. It is the area of the theangle formed by demand cure and the puce lin puce ↑ $11.5t 8=92-P - Consumer suplus when 8=0, P= 92 11.5 area off= Lx base x height Qua Cºlx 28 x (1 -) LX*X 3.5 27 28 Quantity th Consumer serplees is equal to $49.