Question

The demand and supply equations for the Wheat market are: Demand: P = 200-4q Supply: P = - 50 + Q Where P = price per bushel, and Q = quantity 1. Calculate the equilibrium price and quantity. (1.5 Marks) 2. Suppose the government guaranteed producers a price floor of AED 90 per bushel. Estimate the effect on the quantity supplied and demanded. (1.5 Marks) 3. Would the price floor affect the Market outcome? (Calculate the surplus or shortage ). (1.5 Marks)

Answer 1

Details Given Above:

1. Demand Equation: P = 200-4q

2. Supply Equation: P = -50+Q

To Arrive Equilibrium Price and Quantity Supplied and Quantity Demanded should be equal

Demand Equation can be written as ---------------------4q = 200-P ie., q_d = (200-P)/4

Supply Equation Can be written as ------------------------Q_s = P+50

At Equilibrium: q_{d =} Q_s

_{(200-P)/4 = 50-P/4 = P+50}

_{-P/4 -P = 50 -50}

_{4(-P/4-P) = 0}

_-P-4P=0

_{-5P =0}

_0=5P

Price at equilibrium is 0 (Zero)

Equation for Quantity Demanded 4q = 200-P

4q = 200 -0

q = 200/4 = 50

2. If the Floor Price is Rs. 90

Demand Equation q_d = (200-P)/4 = (200-90)/4 = 27.5

Supply Equation Q_s = P+50 = 90+50 = 140

3. Would the Supply price affect the market outcome?

Yes. as the floor price is fixed above equilibrium price the Supply increased and demand fallen as above