3) Consider the simple market diagram below (not to scale) in which there is no

Question

3) Consider the simple market diagram below (not to scale) in which there is no extermality 20 MC 16 12.72TAOAATTTT 10H 4 MB 60 87.27 120 Suppose the government imposes a quota at Q = 60 and the resulting price is P = $15. A) How much is consumer surplus under the quota? (give me a dollar value) B) How much is producer surplus under the quota? (give me a dollar value) C) At which quantity is total surplus the greatest? (circle your answer) i) 60 ii) 87.27 iii) 120 iv) it cannot be determined unless we know what the prices are at these quantities

Explanation / Answer

a) Consumer surplus is given by CS = 0.5*(Max price – current price)*current qty = 0.5*(20 – 15)*60 = $150.

b) Producer surplus is the area of two figures PS = (15 - 10)*60 + 0.5*(10 – 4)*60 = $480

c) Total surplus is maximum when the market is in equilibrium so that price is $12.72 and quantity is 87.27. The required quantity is 87.27 units

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