Question

1. Suppose that weekly demand for wheat in Australia is given by P = 1800 – 2Q, and supply is given by P = 4Q, where Q represents tonnes of wheat. The government has decided to impose a price ceiling of $800 per tonne. This suggests that _________ of _________ will result in this market. Following the price ceiling, producer surplus will _______ by_______.

a. neither excess demand or excess supply, 0 tonnes, not increase or decrease, $0.

b. excess demand, 300 tonnes, increase, $70,000.

c. none of the above.

d. excess demand, 300 tonnes, decrease, $20,000.

e. excess demand, 300 tonnes, decrease, $100,000.

2. Suppose that weekly demand for coal in Australia is given by P = 1800 – 2Q, and supply is given by P = 4Q, where Q represents tonnes of coal. To support consumers by trying to lower energy prices, the government has decided to impose a price ceiling of $1200 per tonne. This suggests that _________ of _________ will result in this market. Following the price ceiling, consumer surplus will _______ by_______.

a. excess supply, 300 tonnes, increase, $100,000

b. none is correct.

c. excess demand, 300 tonnes, decrease, $20,000

d. neither excess demand or excess supply, 0 tonnes, not increase or decrease, $0

e. excess demand, 300 tonnes, increase, $70,000

Answer 1

1. e. excess demand, 300 tonnes, decrease, $100,000.
(P = 800 = 1800 – 2Q
So, 2Q = 1800 - 800 = 1000
So, Qd = 1000/2 = 500
P = 800 = 4Q
So, Qs = 800/4 = 200
Excess demand = Qd - Qs = 500 - 200 = 300

At equilibrium, Qd = Qs
So, 1800 - 2Q = 4Q
So, 2Q + 4Q = 6Q = 1800
So, Q = 1800/6 = 300
P = 4(300) = 1200
Pc = 800

Decrease in PS = area of trapezium = [(Q+Qs)/2]*(P-Pc) = [(300+200)/2]*(1200-800) = (500/2)*400 = 100,000)

2. d. neither excess demand or excess supply, 0 tonnes, not increase or decrease, $0
(When ceiling = equilibrium price, then there is neither excess demand nor excess supply.)