Question

Suppose the inverse demand equation for taxi is P = 100 − 2Q and the inverse supply equation is P = 2Q. Suppose there’s a policy that restricts the price to be at least $65. Which of the following statements is correct?

A. The market equilibrium price will be 70.

B. There will be no excess demand or excess supply.

C. There will be an excess demand of 15 units.

D. There will be an excess supply of 15 units. I got an answer of 19 units? what did I do wrong?

Answer 1

Ans. Correct Option is D. There will be an excess supply of 15 units

Explanation.

Given , P = $65

by putting the value of P in Supply function ,

P = 2Q

65 = 2Q

Q = 65/2

Q = 32.5

by putting the value of P in Demand function ,

P = 100 - 2Q

65 = 100 - 2Q

2Q = 100 - 65

Q = 35 / 2 = 17.5

So it is a state of excess supply as the value of supply function is more than demand function

Excess Supple = Quantity Supply - Quantity Demand

                          = 32.5 -17.5 = 15 units

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