At the current market equilibrium, the price of a good equals S40 and the quanti
ID: 2495887 • Letter: A
Question
At the current market equilibrium, the price of a good equals S40 and the quantity equals 10 units. At this equilibrium, the price elasticity of supply is 2.0. Assume that the supply schedule is linear. Use the price elasticity and market equilibrium to find the supply schedule. Calculate the producer surplus in the market. Imagine that a policy results in price falling from $40 to $30. By how much docs producer surplus fall? What fraction of the lost producer surplus is due to the reduction in the quantity supplied and what fraction is due to the fall in price received per unit sold?Explanation / Answer
Q = a+bP, where b =Change in Q/Change in P
E= % change in Qs/ % change in Price
2 = (Change in Q/Changein P)*40/10
Change in Q/Changein P = 0.5
Q = a+bP, where b =Change in Q/Change in P
10 = a + 0.5*40
a = 10 - 20 = -10
Then Supply function
Q = -10+0.5P
Produce Surplus =0.5*(40-20)*10=100
Produce Surplus =0.5*(30-20)*10=50 (fall by 50)
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