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The demand for wheat is given by: QD= 137.5 -0.25P. The supply of wheat is given...

The demand for wheat is given by: QD= 137.5 -0.25P. The supply of wheat is given by: QS= 10P -170. Suppose the government imposes a price ceiling of $25. Calculate the dollar amount of consumer surplus with the price ceiling.

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Answer #1

After consumer surplus, the equilibrium quantity is Qs at the price ceiling

Qs=10P-170

P=25

Qs=10*25-170

Qs=80

-------

the maximum willingness to pay of consumer at that quantity is

Q=137.5-0.25P

80=137.5-0.25P

0.25P=57.5

P=230

--------

converting the demand curve to the inverse demand curve

Q=137.5-0.25P

0.25P=137.5-Q

P=550-4Q

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consumer surplus =0.5*( Y-axis intercept of the demand curve - maximum willingness to pay at the price ceiling equilibrium)*Qs+( maximum willingness to pay at the price ceiling equilibrium - price ceiling )*Qs

=0.5*(550-230)*80+(230-25)*80

=29200

the consumer surplus is $29200

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