Question

A market demand and supply functions are as follows: Qd = 500 - P/4, and Qs = P/2 - 100.

For parts 2-5, use ONE graph.

1. Determine the equilibrium price and quantity.

2. Graph the inverse demand and supply curves with Q on the horizontal axis and P on the vertical axis. Clearly label all axes, curves, intercepts, and the equilibrium price and quantity values

3.Assume the government sets a rule that the selling price cannot go above $400. What kind of a price restriction is this? Answer with two words. Draw this price restriction on your graph in part (2) and label it.

4. Will this government restriction cause a shortage or surplus? Answer with one word. Calculate this value and show it on your graph in part (2).

5. what is the deadweight loss with the price restriction in place? Calculate this value and show this area on your graph in part (2)

Answer 1

Answers

1. Equilibrium price=$800, Equilibrium quantity= 300 units.

G At equilibrium Ad = Os Soo - P P р 4 2 3 Р. - Goo 4 P=$800 Ad=Qs = 500 - 800 300

3. Two words: Price ceiling

4. One word: Shortage, Value ofof Shortage= 300 units

5. Dead weight loas is the cost to the consumers and producers due to shortage created by government through price ceiling.

Value of dead weight loss= $120000

2. Part graph

(100,1600) A Loss 3. Deadweight S А A 2000 2000) 1 800 16oo. 1400 1200 tooot 800 (300 800) E Price Ceiling (ره) قم CYD, 900) 200 torpeed 1 60(5000) + 4 o СО 0 t Shortage = 300 ay Shortage 400 -1oo 300 a. Deadweight Loss = area of a ABC - area of A EBC 300 x 1200) - (1 300 x Yoo) 2 180000 60ooo Deadweight Loss Value 120000 2