Question

Given the data below for the oil market, show a supply and demand diagram, determine the linear equations for demand and for supply, and find the equilibrium price and quantity in the market. Find both sets of equations for Q = f(P), and P = f(Q).

QD	P	QS
83	60	80
82	70	82
81	80	83
80	90	83
79	100	84
78	110	85
77	120	86
76	130	86
76	140	87
75	150	88

• Would a price of $90 be a price ceiling or a price floor? Explain.

Answer 1

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

As it can be seen in the table that at price $90, the quantity supplied is 83 units and quantity demand is 81 units.

It means there is excess supply at price $90.

Hence this is example of price floor because effective (binding price floor) create surplus.