Price (S/box ammunition) $20 S, quota 15 12 10 8.52- 5- D 0100\'200 300 330 400

Question

Price (S/box ammunition) $20 S, quota 15 12 10 8.52- 5- D 0100'200 300 330 400 500 Quantity of ammunition (boxes/week) Use figure above to answer the following questions: In the free market, what are the equilibrium price and quantity of ammunition? b. a. If the government imposes a 200-box quota on ammunition, what are the new equilibrium price and quantity? c. What is the area of consumer surplus before the quota? d. What is the area of consumer surplus after the quota? e. What is the area of producer surplus before the quota? f. What is the area of producer surplus after the quota? g. What is the deadweight loss from the quota?

Explanation / Answer

a) Equilibrium occurs where demand meets supply. Eprice = $8.52 and Equantity = 330 boxes.

b) Qprice = $12 and Qquantity = 200 boxes

c) CS before quota = area (A + B + E)

d) CS after quota = area A

e) PS before quota = area (C + F + D)

f) PS after quota = area (D + C + B)

g) DWL = area (E + F)

Note: Exact numerical values for areas are not possible for the given figure because the intercept values of demand and supply are not given in the graph. Hence only covered areas are named.

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