Question

Assume that the market demand function is:

Q(D) = 1900 - 3P

And the market supply function is:

Q(S) = -100 + 7P

Which of the following statements are correct? Multiple statements may be correct.

		If the government establishes a legal minimum price of $190 a unit, then quantity demanded will be 1300 and the quantity supplied will be 1300 and the minimum price will have no impact on the market.
		If the government establishes a legal maximum price of $190 a unit, then quantity demanded will be 1330 units and the quantity supplied will be 1230. As a result, there will be a surplus of 100 units in the market.
		If the government establishes a legal maximum price of $250 a unit, then quantity demanded will be 1300 and the quantity supplied will be 1300 and the legal maximum price will have no impact on the market.
		If the government establishes a legal minimum price of $250 a unit, the quantity demanded will be 1150 and the quantity supplied will be 1650. As a result, there will be a surplus of 500 units in the market.

Answer 1

Options (1), (3), (4).

In free market equilibrium, QD = QS.

1900 - 3P = - 100 + 7P

10P = 2000

P = $200

Q = 1900 - 3 x 200 = 1900 - 600 = 1300

Therefore, any price higher than $200 is a binding price floor and a price lower than $200 is a binding price ceiling. A floor price lower than $200 or a ceiling price higher than $200 will not be binding.

When maximum price = $190,

QD = 1900 - 3 x 190 = 1900 - 570 = 1330

QS = - 100 + 7 x 190 = - 100 + 1330 = 1230

Since QD > QS, there is a shortage equal to (1330 - 1230) = 100.

When minimum price = $250,

QD = 1900 - 3 x 250 = 1900 - 750 = 1150

QS = - 100 + 7 x 250 = - 100 + 1750 = 1650

Since QS > QD, there is a surplus equal to (1650 - 1150) = 500.