Question

If demand in the cake market is Qd= 600 - 10p, and unrestricted supply is Qs = 200 + 10p, what is the effect on price, quantity, producer, and consumer surplus of a baker’s license that reduces cake supply to Q's= 10p?

Answer 1

Before the change in supply

Qd = Qs

600 - 10P = 200 + 10P

400 = 20P

P = 20, Q = 400

CS = 0.5*(60 - 20)*400 = 8000, PS = 0.5*20*(400 + 200) = 6000.

After the supply change

600 - 10P = 10P

P = 30 and Q = 300

CS = 0.5*(60 - 30)*300 = 4500

PS = 0.5*(30 - 0)*300 = 4500

Hence producer surplus and consumer surplus will fall due to supply change. Price will increase and quantity will fall.