Question

A market is described by the following supply and demand curves:

QSQS	=  =	3P3P
QDQD	=  =	400−P400−P

The equilibrium price is______

and the equilibrium quantity is_______

.

Suppose the government imposes a price ceiling of $80. This price ceiling is (binding or not binding) , and the market price will be

. The quantity supplied will be______

, and the quantity demanded will be_____

. Therefore, a price ceiling of $80 will result in (a shortage, neither a shortage nor a surplus, a surplus) .

Suppose the government imposes a price floor of $80. This price floor is ______ , and the market price will be______

. The quantity supplied will be______

and the quantity demanded will be_____

. Therefore, a price floor of $80 will result in (a shortage, neither a shortage nor a surplus, a surplus) .

Instead of a price control, the government levies a tax on producers of $40. As a result, the new supply curve is:

QS

=

3(P-40)

With this tax, the market price will be_____

, the quantity supplied will be________

, and the quantity demanded will be_______

. The passage of such tax will result in (a shortage, neither a shortage nor a surplus, a surplus) .

Answer 1

At equillibrium, supply = demand

So, 3P = 400 - P

P = 100

Equillibrium Price is 100

Equillibirum Quanity is 300

Government imposes price ceiling, which is binding

Supply will be 240

Demand will be 320

This will create a shortage.

Government imposes price floor, which is not binding

Supply will be equillibrium supply, i.e. 300

Price will be equillibrium price i.e. 100

This will neither be a shortage nor surplus.

Government applies a tax

New Supply Qs = 3(P-40)

Making Supply = Demand

3(P-40) = 400-P

4P = 520

P = 130

Market Price will be 130

Demanded Quantity will be 270

Market Supply will be 270

This will neither be a shortage nor surplus.