Question

Question 3: Consider the market for after school daycare where the demand is given by Qº = 100 – 2P and the supply is given by Q = 5P. a What is the equilibrium price and quantity in this market? Show it on a graph. b Suppose the government is debating placing a price ceiling to help consumers. At what prices will the price ceiling have an effect on the market? c Pick a price where the price ceiling is binding and calculate the shortage/surplus caused by the policy.

Answer 1

& os = 5P (equilibrium) o = 100-2P OD = os 100-2P = P I 100 = 5P +2P 100 = 7P Q = 5(100) 500 p* +-+-4m 100 500

(6) Price ceiling is the legal maximum price at which goods can be sold Price ceiling will be effective or binding when it is set below equilibrium price P = 100 is equilibrium price so any price which is pt = 100 would be effective or price ceiling. set below binding Thus, Price when ceiling will be binding p <P * = 100 any is below Now take pt = 100 price say which = 10 At p=10 Oo= QP = 100-2P 100 - 2010) 100 - 20. = 80 as = = 5P 5(10) = 50

Cleary of os which means cet P=10 there is shortage of the commodity. Henne binding price ceiling neater mortage of the good in the market. Shartage = OP - OS = 80 - 50 = 30 The ghor graphical represenation is given below ss - Price ceiling, 100 å 50 500 go = 80-50 = 30