Question

Effects of Price Controls The accompanying table shows the demand and supply schedules for concert tickets at Oracle Arena: Quantities are in THOUSANDS 6 Lost Demand Ticket Price Q d Q s $150.00 20 24 $135.00 22 22 $120.00 24 20 $105.00 26 18 $90.00 28 16 $75.00 30 14

a. Find the equilibrium price and quantity.

b. Suppose that the Oakland mayor sets a price ceiling of $105. How large is the shortage of concert? Show on the supply and demand diagrams, and also calculate the amount of ticket shortage. Who loses and who benefits from this policy?

c. Suppose that the stock market crashes, demand for concert tickets plummet as a result. 6K less concert tickets are demanded per year (shifting the Qd curve). What effect will the mayor's new policy have now?

d. Suppose that the stock market skyrockets, as does the demand. Now the mayor wants to ingratiate himself with the Oracle Arena and sets a $150 price floor. Illustrate the effects of this policy on the market, and determine the new price and quantity. What is the deadweight loss?

Answer 1

. The equilibrium will be at point where quantity demand and quantity supply are equal. In the given case at ticket price $135 quantity demanded for ticket is equal to quantity supply of ticket. That is- at $135 quantity demanded is 22 untis and quantity supplied is also 22 units, therefore equilibrium price is $135 and equilibrium quantity is 22 units.

b. When price is ceiling is set at $105, then demand will be 26 units and supply will be 18 units. At this poind demand will exceed supply by 8 units. The price will drop to $105 from $135, therefore seller will bear a loss of $30 ($135-$105).