Question

Consider a perfectly competitive market in which the market demand curve is given by

Qd = 10 – 2Pd, and the market supply curve is given by QS = 2PS.

a. ) Find the equilibrium price and quantity in the absence of government

intervention. Graph it.

B.) Suppose the government imposes a price ceiling of $3 per unit. How much is supplied?

C.) Suppose, as an alternative, the government imposes a production quota limiting the quantity supplied to six units. What is the market price under this type of intervention?

D.) Suppose, as an alternative, the government imposes a tax of $4 to reduce the output. What is the market price and output under this type of intervention? What percentage of the tax is passed on to consumers?

E.) Compare prices and outputs under three different government interventions.

F.) Assuming that under all three different interventions rationing is as efficient

as possible. Under which program / intervention is the DWL larger?

G.) Assuming that under all three different interventions rationing is as inefficient as possible. Under which program is the DWL larger?

Answer 1