Question

Suppose that the demand for corn is given by P_D = 11 – 0.4Q_D and the supply is given by P_S = 4 + 0.2Q_S. A price ceiling is imposed on the price of corn at $5. This will cause a ______________________.

		no shortage or surplus because the price ceiling is set above the equilibrium price
		shortage of 15 units
		surplus of 15 units
		surplus of 10 units
		shortage of 10 units

Answer 1

Set PD=PS to determine the equilibrium quantity

11-0.4Q=4+0.2Q

0.6Q=7

Q=70/6

Equilibrium price=11-0.4*70/6=6.33

A price ceiling of $5 will be binding as price ceiling is below equilibrium price.

Let us calculate the quantity demanded at a price of $5

PD=11-0.4QD

5=11-0.4QD

QD=6/0.4=15

Now we calculate the quantity supplied at a price of $5

PS=4+0.2QS

5=4+0.2Qs

QS=1/0.2=5

Since QS>QS, there is a shortage in the market.

Shortage=QD-QS=15-5=10

Correct option is

shortage of 10 units