3. What is equilibriun? (a) The demand for wheat is P 960 1.75Q while the supply

Question

3. What is equilibriun? (a) The demand for wheat is P 960 1.75Q while the supply is P 1600.25Q. Find out the equilibrium P and (b) What do we mean by being "out of equilibrium"? What role does the price play to reach the equilibrium (c) Refer to 3 a). Suppose the government imposes a price support (price floor) of P = 330 How much is the surplus of wheat? (d) Refer to 3(a). Suppose the government imposes a price floor of P 225. How much is the shortage of wheat? (e) Refer to 3(a). Answer questions 3(c) and 3(d) if they were price ceilings instead

Explanation / Answer

a) Qd=Qs
960-1.75Q=160+0.25Q
800 = 2Q
Q = 400
P = 960-1.75*400 = 260
b) Equilibrium is where demand equals supply and out of equilibrium would be above or below the equilibrium level. Price plays important role on quantity being supplied by producers and quantity being demanded by consumers
c) Surplus = Qs-Qd = 680-360 = 320
d) Shortage = Qs-Qd = 260-420 = 160
e) The equilibrium price 260 which is less than 330 would not be effective and for 225 it would lead to shortages as it is less than equilibrium price.

P

Qd

Qs

330

360

680

225

420

260

P

Qd

Qs

330

360

680

225

420

260

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