Question

17. Assume that the demand and supply curve for an illegal painkiller is given by the follow- ing: p=500-2Qd and p=80+4Qs If the government legalises it and imposes a ceiling price of 300, then we would expect: (a) An excess supply of 20 (b) An excess demand of 20 (c) An excess supply of 30 (d) An excess supply of 30 (e) None of the above

If the correct answer is (b) An excess demand of 20.

Thanks!

Answer 1

Equilibrium is where demand and supply both are equal

Demand Function

P = 500 - 2Q

Supply Function

P = 80 + 4Q

Equating both demand and supply

500 - 2Q = 80 + 4Q

420 = 6Q

Q = 70

P = 360

Equilibrium Price =$360

Equilibrium Quantity = 70 units

At a price ceiling of $300

Demand Function

P = 500 - 2Q

300 = 500 - 2Q

Q = 100

Supply Function

P = 80 + 4Q

300 = 80 + 4Q

Q = 55

So at a price ceiling of $300 quantity demand will be 100 units and quantity supply will be 55 units

Excess Demand = Demand - Supply

Excess Demand = 100 - 55

Excess Demand = 45

Option E is correct