Question

As a recently hired analyst, you have determined the demand function for the market in which your firm operates is equal to

Q(D) = 1,163 - 4*P

and the supply function of the market in which your firm operates is equal to

Q(S) = -21 + 1P

Now assume that the federal government passes a law to protect consumers. A part of this law sets the maximum legal price at 116.

What is the resulting shortage?

Answer 1

Solution:

The demand function is given by: Q(D) = 1,163 - 4*P

The supply function is given by: Q(S) = -21 + 1P

The equilibrium is given by where:

Q (D) = Q(S)

1163 – 4P = -21 + 1P

1184 = 5P

P = 236.8

So,

Q = -21 + 236.8

Q = 215.8

When the federal government sets the maximum legal price at 116,

Q(S) = -21 + 1P

Q(s) = -21 + 116

Q(S) = 95

Q(D) = 1163 – 4P

Q(D) = 1163 – 4(116)

Q(D) = 1163 – 464

Q(D) = 699

Hence, the quantity supplied is 95 and quantity demanded is 699; which creates a shortage of 604(699 – 95) units.