Question

Consider the market for butter in Saudi Arabia. The demand and supply relations are given as follows:

Demand:
*Q**D* *= 12 - 2P*

Supply:
*Q**s* *= 3P - 3.*

*P* is the price of butter.

- Calculate:

**Equilibrium price _____________ 2. Equilibrium quantity**_____________

**Consumer surplus**___________ 4.**Producer surplus**___________

- Draw the demand and supply graphs. Show the equilibrium price and quantity, consumer surplus and producer surplus in the graph below. Graphs must be on scale.
- Suppose government imposes a price
**ceiling**of SAR1 per unit on butter. Calculate: Excess demand or excess supply of butter . - Suppose the government imposes a tax of SAR1 (SAR) per unit of butter on the suppliers. Calculate:
**Government revenue**____________.

Answer #1

a) At equilibrium point the demand = supply

12 - 2P = 3P - 3

12+3 = 3P + 2P

15 = 5P so P = 15 / 5 = 3.

Now put P = 3 in demand equation

Qd = 12 - 2(3) = 6

So equilibrium price = 3 and quantity = 6

Consumer surplus = 1/2×(6-3)×6 = 9

Producer surplus = 1/2×(3-1)×6 = 6.

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