Question

Consider the following supply and demand equations:Supply:p= 550 + 3q Demand:p= 750−2q Show your work as you respond to the following questions.(a) What is the market equilibrium?(5%)(b) What is the Total Surplus at equilibrium?(5%)(d) The government imposes a price ceiling of 700. What is Total Surplus? What isthe Deadweight Loss?(10%)(e) Instead, the government imposes a price ceiling of 650. What is Total Surplus?What is the Deadweight Loss?(10%)

Answer 1

a) Demand function, q = 375 - 0.5p

and Supply function, q = -550/3 + 1/3 * P

At Equilibrium,

Demand = Supply

375 - 0.5p = -550/3 + 1/3 * P

=> p =$ 670
From supply and demand function

=> q = 40 units

b) Total surplus = [Price when quantity demanded is 0 - Price when quantity supplied is zero] * q

=> Total surplus = (750 - 550)*40 = $8000

c) When there is a price ceiling of $700, there is no effect on market equilibrium as market is already at equilibrium at $670

d) At price ceiling of $650, quantity supplied = 100/3 units.

Thus, total surplus = ar ABCD = 0.5*[(750 - 550) + (683.33 - 650)]*100/3 = $7777.78

e) Deadweight loss = ar OBC = (683.333 - 650)*(40 -33.333) = $222.222