Question

A market is described by the following supply and demand curves: Qs = 4P QD = 400-P The equilibrium price is $ ___ and the equilibrium quantity is ___.

Suppose the government imposes a price ceiling of $60. This price ceiling is ___ (binding/not binding), and the market price will be $ ___. The quantity supplied will be ____ (a shortage/neither a shortage nor a surplus/a surplus), and the quantity demanded will be ____. Therefore, a price ceiling of $60 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) With this tax, the market price will be $___, the quantity supplied will be ___ and the quantity demanded will be ___. The passage of such tax will result in ____ (a shortage/neither a shortage nor a surplus/a surplus).

Answer 1

The market's equilibrium price is $80 with an equilibrium quantity of 320. A binding price ceiling of $60 creates a shortage, with quantity demanded at 340 and quantity supplied at 240. A tax affects the supply curve, changing the equilibrium price and quantity, and in equilibrium, does not cause a shortage or surplus.

Step-by-step explanation:

The equilibrium price and equilibrium quantity in a market occur where the supply and demand curves intersect. At this point, quantity demanded equals quantity supplied.

With supply curve Qs = 4P and demand curve QD = 400 - P, setting Qs equal to QD gives us 4P = 400 - P. Solving for P gives us P = 80. Therefore, the equilibrium price is $80, and the equilibrium quantity, found by plugging the price back into either equation, is 320.

If the government imposes a price ceiling of $60, this price ceiling is binding because it is below the equilibrium price. At this price, the new quantity supplied is Qs = 4(60) = 240, and the quantity demanded is QD = 400 - 60 = 340. The market price will be $60, and we observe a shortage since the quantity demanded exceeds the quantity supplied.

When the government levies a tax on producers of $10, the new supply curve becomes Qs = 4(P - 10). The new equilibrium price and quantity need to be recalculated by setting the new Qs equal to the original QD and solving for P. Assuming a tax is fully passed on to consumers, the new market price will be higher than the original price minus the tax, and the quantity supplied and quantity demanded will adjust accordingly, resulting in neither a shortage nor a surplus if the market can reach a new equilibrium.