Question

Given that good X has a market supply described by P = 50+10*Qs and a market demand described by P = 200 - 5*Qd, how many fewer items of good X will sell, compared to equilibrium, if the government imposes a price floor of $175? show your work.

Answer 1

Answer: Market Supply : P = 50 + 10*Qs

Qs = (P - 50)/10

Market Demand : P = 200 - 5*Qd

Qd = (200 - P)/5

At equilibrium, Qd = Qs

(P - 50)/10 = (200 - P)/5

P = 150

At P = 150 i.e. at equilibrium Qs = (150-50)/10 = 10 and Qd = (200-150)/5 = 10

Now, at price floor of P = 175, Qs = (175-50)/10 = 12.5 and Qd = (200-175)/5 =5

There will be a situation of excess supply where consumer would buy only 5 units instead of 10 in equilibrium and producers will supply 12.5 units instead of 10 in equilibrium.