Question

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

Demand:             QD = 12 - 2P

Supply:                Qs = 3P - 3.

P is the price of butter.

1. Calculate:

1. Equilibrium price _____________                   2. Equilibrium quantity _____________

3. Consumer surplus ___________                       4. Producer surplus ___________

2. 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.
3. Suppose government imposes a price ceiling of SAR1 per unit on butter. Calculate: Excess demand or excess supply of butter                                .
4. Suppose the government imposes a tax of SAR1 (SAR) per unit of butter on the suppliers. Calculate:
5. 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.