Assignment 4

1. Use the accompanying graph to answer these questions.

a. Suppose demand is D and supply is S .  If a price ceiling of P6 is imposed, what

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are the resulting shortage and full economic price?

Answer:
At a price of P6, the quantity demanded (consumers are willing to buy) is
4, while the quantity supplied (producers are willing to sell) is only 1. So,
there’s a resulting shortage of 3.  Due to the shortage, consumers compete
over the product, thus bid for a higher price. The full economic price at which
consumer will buy the quantity supplied is P12. 
Shortage= 4-1=3, Full economic price= 6+(12-6) =12

b. Suppose demand is D and supply S .  If a price floor of P12 is imposed, what is

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the resulting surplus?  What is the cost to the government of purchasing any
and all unsold units?
Answer:
At a price of P12, the quantity demanded (consumers are willing to buy) is
1, while the quantity supplied (producers are willing to sell) is 2.5. So, there’s
a resulting surplus of 1.5.  The cost of purchasing any and all unsold units is
P18.
Surplus= 2.5-1= 1.5; Cost= 12x(2.5-1)= 18

c. Suppose demand is D and supply is S so that the equilibrium price is P10.  If

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an excise tax of P6 is imposed on this product, what happens to the equilibrium

 price paid by consumers?  The price received by producers?  The number of
units sold?
Answer: 
If an excise tax of P6 is imposed on the product, the equilibrium price paid
by the consumer will increase and the price received by producers will
decrease. The number of units sold will decrease too. Because consumers
will look for less expensive products. 

d. Calculate the level of consumer and producer surplus when demand and
supply are given by D and S , respectively.
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Answer:
The consumer surplus is P4 and producer surplus is P8.
Consumer surplus= ½ x Qd x (Price the buyer is willing to buy- price at
equilibrium) = ½ x 2 x (14-10) = P4
Producer surplus= ½ x Qs x (equilibrium price-minimum price) = ½ x 2 x (10-
2) = P8.

e. Suppose demand is D and supply is S .  Would a price ceiling of P2 benefit any

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consumers?  Explain.
Answer:
At a price ceiling of P2, consumers will benefit from it. It increases their
capacity to buy the product since it becomes cheaper. As the prices
decreases, given that the ceiling price is P2, the demand increases, the
purchasing power of the consumer increases.