7. These are the supply and demand schedules for good X: Quantity Quantity Suppl

Question

7. These are the supply and demand schedules for good X: Quantity Quantity SuppliedDemanded Price $10 18 16 14 12 10 10 12 a) What is the equilibrium price and quantity? At this equilibrium, what is the producer's revenue? b) If the government sets a price of $8 for X, what will be the price, quantity, and revenue? Will there be a shortage or surplus of X? c) If the government sets a price of $3, answer the same questions as in b). d) Suppose the demand for X increases, so that at each price, consumers want to buy three more units of the good. What happens to price, quantity, and revenue? Why has the quantity sold not increased by three units?

Explanation / Answer

Answer
a)
The equilibrium is at quantity demanded =quantity supplied
it is at Q=8 units
and the price at 8 units is $5
so the equilibrium quantity is 8 units and price is $5
Total revenue=P*Q=8*5=$40
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b)
If P=$8 then Qs=14 units and Qd=5 units, the Qs>Qd which is surplus in the market because at the higher prices than the equilibrium price there is surplus in the market and the equilibrium quantity is based on the demand in this situations or we can say the lower quantity is traded as the demand is only for 5 units at $8 price so Q=5, P=$8(as given and TR=5*8=$40
This situation is also called the price floor where government keep price higher than the equilibrium price to protect producers like minimum support prices.
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c)
P=$3, then Qs=4 units Qd=10 units so the traded quantity is 3 units which is equilibrium
Q=4 units
P=$3 (as set by the government)
TR=4*3=$12
this situation is price ceiling where the government set a price below equilibrium to protect consumers from higher prices.
d)
The demand increases means the new demand is from highest price increases respectively as 6, 7, 8 and so on to 15 units
and the equilibrium is at Qd=Qs=10 units, where P=$6
TR=10*6=$60
the price increases by $1, not by $3 because the increase in demand and price is not same its relative so when demand increases the price increases but as per the elasticity of the demand and supply of the good.

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