Question

A recent study found that the demand and supply schedules for Frisbees are as follows: 

a) What are the equilibrium price and quantity of Frisbees? 

b) Frisbees manufacturers persuade the government that Frisbees production improves scientists, understanding! of aerodynamics and thus is important for national security. A concerned Parliament votes to impose a prices floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold? 

c) Irate students march on Ottawa and demand a reduction in the price of Frisbees. An even more concerned Parliament votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?

Answer 1

1. We know Equilibrium is at the point where :-

a) We can see from the above table :-

At Price = $8

Quantity Demanded = 6 million and Quantity Supplied = 6 million

So, Quantity Demanded = Quantity Supplied = 6 million at Price = $8

Hence, Equilibrium Price of Frisbees = $8

and Equilibrium Quantity of Frisbees = 6 million

b) Price Floor of $2 above equilibrium price means :

New Price = Equilibrium Price + $2 = $8 + $2 = $10

At Price Floor of $10 :-

Quantity Demanded = 2 million and Quantity Supplied = 12 million

As, Quantity Demanded < Quantity Supplied

So there is a surplus of Frisbees

So, Quantity Sold = Quantity Demanded = 2 million

Hence, New Market Price of Frisbees after Price floor = $10

and New Quantity of Frisbees Sold = 2 million

c) A price ceiling is set at $1 below the price floor means :

So, New Price = Price Floor - $1 = $10 - $1 = $9

As, Price Ceiling = $9

Now we know when:

Price Ceiling > Equilibrium Price, then there is no effect and the market operates at equilibrium level.

So, New Market Price = Equilibrium Price = $8 (as calculated earlier)

and Quantity of Frisbees Sold = Equilibrium Quantity = 6 million (as calculated earlier)

Answer 2

Equilibrium is attained when quantity demanded = quantity supplied

Here, equilibrium is attained at 8$.

(b)

In order to add 2$ in equilibrium price simply, 2$+8$ = 10$

(c)

A price floor that should be $1 less than the former price floor will lead to a market price of 10-1 = $9. The quantity demanded of Frisbees become 4 million and the quantity supplied is 9 million.