Question

Consider a perfectly competitive market where the market demand curve is given by Q = 76−8P and the market supply curve is given by Q=−8+4P. In the situations (e), determine the following items (i-viii)

(e) A market with price floor F = 6.

i) The quantity sold in the market.

ii) The price that consumers pay (before all taxes/subsidies).

iii) The price that producers receive (after all taxes/subsidies).

iv) The range of possible consumer surplus values.

v) The range of possible producer surplus values.

vi) The government receipts.

vii) The net benefit.

viii) The range of deadweight loss.

Answer 1

Here the market equilibrium price is

76 - 8P = -8 + 4P

84 = 12P

P = 7

Hence a price floor of $6 is not binding . Thus, the market price of $7 is still applicable

i) Quantity sold = -8 + 4*7 = 20 units

ii) The price that consumers pay (before all taxes/subsidies) = $7.

iii) The price that producers receive (after all taxes/subsidies) = $7

iv) The range of possible consumer surplus = 0.5*(76/8 - 7)*20 = $25

v) The range of possible producer surplus = 0.5*(7 - 8/4)*20 = $50

vi) The government receipts = $0

vii) The net benefit = CS + PS = $75

viii) The range of deadweight loss = $0