Suppose the market for laptop computers is perfectly competitive, with the follo
ID: 1208956 • Letter: S
Question
Suppose the market for laptop computers is perfectly competitive, with the following demand and supply equations for quantity per month: Q^S = 10P - 10,000 Q^D = -5P + 20,000 Solve for the equilibrium price and quantity. When this perfectly competitive market is in equilibrium, what is the approximate dollar value of market consumer surplus? When this perfectly competitive market is in equilibrium, what is the approximate dollar value of market producer surplus? In equilibrium, what is the value of the total benefits (consumer plus producer surplus) provided by this market? Now suppose the government imposes, and enforces, a price ceiling of S1,500 on this market to help buyers get their computers at a lower price. Assume for now that there is no secondary market, i.e., no one sells this good for more than $1,500). Also assume that after the price ceiling is imposed, the now smaller number of units made available are bought by those who value those units the most (i.e., those who are willing to pay more for the units will get them before those who are willing to pay less). What is the new value of market consumer surplus? What is the new value of market producer surplus? What is the new value of total benefits from this market? What is the "deadweight loss" (or "efficiency loss" or "welfare loss") caused by this price ceiling? In this example: Is imposing the price ceiling a Pareto improvement? Explain briefly why or why not. Is it a potential Pareto improvement? Explain briefly why or why not. Now suppose, once again, that the government imposes the price ceiling of $1,500 on this market to help buyers get their computers at a lower price. But this time, "middlemen" buy up the available supply, and sell it on secondary or "black market" at the highest price they can get. What is the new value of market consumer surplus? What is the new value of market producer surplus? What is the profit earned by the "middlemen"? What is the new value of total benefits from this market? What is the "deadweight loss" (or "efficiency loss" or "welfare loss") caused by this price ceiling? Does the existence of a black market change our conclusion about ceiling being a PI or PPI? Explain briefly.Explanation / Answer
Answer:
Suppose the market for laptop computers is perfectly competitive, with the following demand and supply equations for quantity per month:
Given the supply and demand equations are:
Qs = 10P – 10,000
Qd = -5P + 20,000
The equilibrium price and quantity is: Qs = Qd
10P – 10,000 = -5P + 20,000
30P = 30,000
P = $1,000
Now we can substitute P value into the demand equation, then we get
Q = -5(1,000) + 20,000
Q = 15,000
Therefore, equilibrium price is $1,000 and quantity is 15,000
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