a. (5) What is equilibrium price and quantity? b. (10) Suppose this question rel

Question

a. (5) What is equilibrium price and quantity?

b. (10) Suppose this question relates to the book market. If the government is lobbied by book publishers to protect print books in an increasingly digital world. What pricing policy would you recommend a price ceiling or a price floor?

c. (5) From part b, name your price and describe how that effects the market in terms of quantity demanded, supplied and purchased.

Price Q Demand Q Supply 10 0 10 9 1 9 8 2 8 7 3 7 6 4 6 5 5 5 4 6 4 3 7 3 2 8 2 1 9 1 0 10 0

Explanation / Answer

a) Equilirium is established where the demand and supply are equal. Thus here at the price $5 both demand and supply are equal or in other words,

Equilibrium price is $5

Equilibrium Quantity is 5 units

b) Floor price: Since the floor price is the minimum price below which price should not fall. Here floor price should be below the equilibrium price else if price is above the equilibrium price, then surplus would be there

Ceiling price: this is maximum price that a producer can charge, thus it can be set above the equilibrium price.

c) If floor price is at $4 which is less than the equilibrium price, then there would be excess demand equal to the 2 units. Competition among the buyers would push the price to equilibrium level

If the ceiling price is 6, then there would excess supply equal to the 2, again competition among the suppliers would bid down the price to equilibrium level.

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