Question

Consider a market with demand and supply functions:

Supply function: ? = 40? − 40

Demand function: ? = 200 − 20?

a. Draw the demand-supply curves. Find equilibrium price and quantity. Find consumer surplus, producer surplus, and total surplus in the graph.

b. Calculate exact size of consumer surplus, producer surplus, and total surplus, respectively. Welfare effects of a price control. The government sets a price floor at $5.

c. Find the market price and quantity traded, and the size of surplus or shortage under the price floor.

d. Find and calculate the new consumer surplus, producer surplus, government revenue (if any), and total surplus under the price floor. [Hint: Although we didn’t specifically discuss this case in our lecture, we learned a general logic. For example, the consumer surplus is the area below demand curve and above the price consumers pay. Similarly, you can find producer surplus and government revenue, respectively.]

Answer 1

Coin supply faction Q = 40P-40 When PO = Q = -40 wim Q=0=) 40p= 40 =0 =) P=1 Demand biction 200-20p Q2 =) Why P=0 =) Q=200 Whe Q0 =) 200-20 Pro p=10 a At equilibrum, demand equals supply. fices 40P-40=200-420p 60P = 240 4 supply pa substituting P=4 in either demand or in equation weat equilibuum Quarkity. tice; Q = 40P-40- : (40x4)-40 = 160-40 : 120 nits CS Scanned with CamScanner

trice Rodun suples Now total sumples a Area of a TU VX = base Xheight Hoo-ofy 'X' we substitute Q=100 To gut point in supply equation, hice, Q = 4op- 40 = tot 2) 100 = 402-40 =) 140=40p P= 3.5 -) $ 153 in ce area of Tuvx = (1600) X(5-3.5) 3 X Aiea of DxVD = I x base X heignt = x (100-0) x (3.5+1) = $125 $ (153712555$ 279 # Consmu suples t produs suples = 9(2507278) $528 Hue we don't have ay government seveme or goun nuent reveme=0 as simples es from conswers to producus. - transferred from consucess CS Scanned with CamScanner