Problemm A free market can be described by the following equations: Qd-1125 - 12

Question

Problemm A free market can be described by the following equations: Qd-1125 - 12.5P (equation for the market demand curve) and Qs 110OP 1100 (equation for the market supply curve) 1. What is the equilibrium price (P) in this market? (whole number only; no decimal) 2. What is the equilibrium quantity (Q) in this market? (whole number only; no decimal) 3. How much is consumer surplus (CS)? (whole number only; no dollar sign, comma, or decimal .How much is producer surplus (PS)? (whole number only; no dollar sign, comma, or decimal) 5. Suppose the government implements a quantity control. What price must consumers pay in order to only demand a quantity of 500? (whole number only; no dollar sign, comma, or decimal)

Explanation / Answer

Qd = 1125 - 12.5P

Qs = 1100P - 1100

Demand and supply must equal at the point of equilibrium, so we equate the quantity demanded and quantity supplied equations

1125 - 12.5P = 1100P - 1100

1112.5P = 2225

1. P = 2

2. Q = 1100*2-1100 = 1100

3. Consumer Surplus = 0.5*(90-2)*1100 = 48400, it is the area of upper triangle which is calculated by multiplying the base and height and dividing by 2.

4. Producer Surplus = 0.5*(2-1)*100 = 50,similar is the case with producer surplus, but it is the lower triangle. Producer surplus is the benefit producer receives when his product is sold at a price higher than the price for that quantity.

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