Question

The inverse demand and supply functions for hand sanitizer in Accra are as follows: (P = 100 - Q) and (Q = LSP), where (P) is the price of a 50 ml hand sanitizer.

a. Sketch the demand and supply functions on one graph.
b. Compute the market-clearing price and quantity for hand sanitizer.
c. Compute the consumers' surplus and total surplus in this market.
d. Suppose the cost of distilling alcohol rises such that at every quantity, cost rises by GH¢20.00. How will that affect the equilibrium price and quantity for hand sanitizer?

e. If the Regional Minister of Greater Accra argues that the free-market price for hand sanitizer is too high for the ordinary person to pay. What's the effect of a price ceiling at GH¢65.00?

f. The Minister of Trade contends that the equilibrium price is rather too low for hand sanitizer producers to earn a fair return. If this contention is accepted, what will be the effect of a price floor of GH¢80.00?

g. What will be the cost to the government of the price floor in the above scenario?

Answer 1

To sketch the demand and supply functions on one graph, we plot the inverse demand and supply functions on a graph with quantity on the x-axis and price on the y-axis. The demand function is P = 100 - Q and the supply function is Q = LSP. We can then plot the demand curve and the supply curve on the graph.

Step-by-step explanation:

To sketch the demand and supply functions on one graph, we plot the inverse demand and supply functions on a graph with quantity on the x-axis and price on the y-axis. The demand function is P = 100 - Q and the supply function is Q = LSP. We can then plot the demand curve and the supply curve on the graph.

To compute the market-clearing price and quantity, we set the demand and supply functions equal to each other: 100 - Q = LSP. We can solve this equation to find the equilibrium quantity, and then substitute this value back into either the demand or supply function to find the equilibrium price.

Consumers' surplus can be computed by finding the area above the demand curve and below the market-clearing price. Total surplus is the sum of the consumers' surplus and the producers' surplus, which is the area below the market-clearing price and above the supply curve.

If the cost of distilling alcohol rises by GH¢20.00 at every quantity, the supply curve will shift upward. This will result in a new equilibrium price and quantity, which will be higher than the previous equilibrium.

If a price ceiling of GH¢65.00 is imposed, it will be below the market-clearing price. This will create excess demand, as quantity demanded exceeds quantity supplied. The effect of the price ceiling will be a shortage of hand sanitizer in the market.

If a price floor of GH¢80.00 is imposed, it will be above the market-clearing price. This will create excess supply, as quantity supplied exceeds quantity demanded. The effect of the price floor will be a surplus of hand sanitizer in the market.

The cost to the government of the price floor will depend on the quantity of hand sanitizer produced and not sold at the price floor. If there is excess supply, the government may need to purchase the surplus quantity at the price floor to support the producers and prevent waste.