In a perfectly competitive market, the market demand curve is Qd= 100-10P and th

Question

In a perfectly competitive market, the market demand curve is Qd= 100-10P and the market supply curve is Qs= 15P.

a. Calculate the market equilibrium price and quantity without any governmental intervention in the market.

b. Calculate the consumer surplus, the producer surplus, and the total welfare for the competitive equilibrium determined in part (a) of this question.

c. Suppose that the government sets a price ceiling of $1 per unit. Determine the price and quantity in this market with the existence of the price ceiling.

d. Calculate the consumer surplus, the producer surplus, and the total welfare for the price ceiling case.

e. Suppose, instead of the price ceiling the government imposes a subsidy (a negative tax) of $5 per unit paid to producers. Determine the price and quantity in the subsidy situation.

f. Calculate the consumer surplus, the producer surplus, the governmental expenditures, and the total welfare for the subsidy situation.

g. Are the quantity supplied and demanded the same with either the price ceiling or the subsidy? Why or why not?

Explanation / Answer

Which governmental intervention results in the lower deadweight loss? The subsidy has the smaller deadweight loss. The deadweight loss under maximum price is area C+H+I, which equals 0.5*(6-1.5)*(8.5-1)=16.875. The deadweight loss under the subsidy is area L, which equals 0.5*(9-6)*(6-1)=7.5

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