Question

Problems and Applications Q10 A market is described by the following supply and demand curves: Qs 4P QD = 400 P The equilibrium price is S and the equilibrium quantity is The quantity Suppose the government imposes a price ceiling of $90. This price ceiling is , and the market price will be $ supplied will be and the quantity demanded will be Therefore, a price ceiling of $90 will result in The quantity Suppose the government imposes a price floor of $90. This price floor is and the market price will be S supplied will be and the quantity demanded will be Therefore, a price floor of $90 will result in Instead of a price control, the government levies a tax on producers of $10. As a result, the new supply curve is: Qs 4(P-10) the quantity supplied will be and the quantity demanded will be . The passage of With this tax, the market price will be s such tax will result in

Options:
A) $90; 160
B) $80; 180
C) $100; 200
D) $70; 140

Answer 1

A price ceiling of $90 will result in a shortage as the quantity demanded exceeds the quantity supplied. A price floor of $90 will result in a surplus as the quantity supplied exceeds the quantity demanded. If the government levies a tax on producers of $10, the quantity supplied will be equal to 4 times the difference between the market price and $10.

Step-by-step explanation:

A price ceiling is a maximum price set by the government that is below the equilibrium price. In this case, the government imposes a price ceiling of $90.

Since the market price will be below the equilibrium price, the quantity demanded (Qd) will be more than the quantity supplied (Qs). This will result in a shortage, where the quantity demanded exceeds the quantity supplied.

A price floor, on the other hand, is a minimum price set by the government that is above the equilibrium price. If the government imposes a price floor of $90, the market price will be above the equilibrium price.

As a result, the quantity demanded (Qd) will be less than the quantity supplied (Qs), leading to a surplus, where the quantity supplied exceeds the quantity demanded.

Instead of a price control, if the government levies a tax on producers of $10, the new supply curve will shift upward to Qs = 4(P-10).

This means that the quantity supplied will be equal to 4 times the difference between the market price (P) and $10. The quantity demanded will remain the same as before.