Question

Again, consider the same scenario, with inverse demand curve and P=30-Q and supply defined by P= 4Q. Calculate the demand price, supply price, and equilibrium quantity, whether the intervention is effective and draw diagrams in any three cases.

1. Consider a quantity quota Q= 3 imposed by the government
2. Consider a price ceiling of P= 20 imposed by the government
3. Consider a price floor of P= 30 imposed by the government

Answer 1

Solution:

At equilibrium, demand = supply

30-Q = 4Q

Q = 6, Demand and supply price i.e P = $24.

Graph for a, b and c

a. Quantity quota is effective as it is less than equilibrium quantity. Thus price increases and there is deadweight loss.

b. Price ceiling is effective as it is less than equilibrium price. There exists shortage of 5 units.

c. Price floor is effective as it is more than equilibrium price. There exists surplus of approx 7 units.