Question

1. Suppose demand and supply are given by Q^d = 60 – P and Q^s = P -20

1. What are the equilibrium quantity and price in this market?
2. Determine the quantity demanded, the quantity suppled, and the magnitude of the surplus if a price floor of $50 is imposed in this market.
3. Determine the quantity demanded, the quantity suppled, and the magnitude of the shortage if a price celling of $32 is imposed in this market. Also determine the full economic price paid by consumers.

Answer 1

Ans. Quantity Demanded, Qd = 60 - P

and Quantity Supplied, Qs = P - 20

a) At equilibrium, the quantity supplied is equal to the quantity demanded, so,

Qd = Qs

=> 60 - P = P - 20

=> P = $40 and thus, Qd = Qs = Q = 20 units

Thus, equilibrium quantity is 20 units and equilibrium price is $40.

b) At price of $50,

Qd = 60 - 50 = 10 units

and Qs = 50 - 20 = 30 units

Surplus = Qs - Qd = 30 - 10 = 20 units

c) At price ceiling of $32,

Qd = 60 - 32 = 28 units

and Qs = 32 - 20 = 12 units

The shortage = Qd - Qs = 28 - 12 = 16 units
Price paid by the consumers = $32