Question

1. A market is described by the system of equations: 800 - 4P and 100 + P. If a ceiling is placed at $50, it would lead to: ?

2. A market is described by the system of equations: 800 - 4P and 100 + P. If a floor is placed at $80, it would lead to: ?

3. How can a firm increase the demand for the product it sells?

4. If a surplus exists in a market, then we know that the actual price is?

Answer 1

1.800 - 4P and 100 + P

Market is in equilibrium when demand is equal to supply

800-4P = 100+P

5P = 700

P = 140

SO IF ceiling is set at $50 which is below the market price of $140, the ceilwis binding. As a result this will result in shortage as demand will exceed supply at this price($50)

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2. If a price floor is placed at $80 then the price floor is not binding as market will still clear at price of $140, as the price is not allowed to fall below $80 but the market will clear at $140.

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3. The firm can increase the demand for the product it sells either by lowering price or advertising it's product.

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4. If a surplus exists in a market, then we know that the actual price is higher than the market price, a surplus will occur when supply of a product is more than it's demand, so a supply will exceed demand when the current price is greater than the market price.