suppose that the demand curve for wheat is P 100 q and the

suppose that the demand curve for wheat is P = 100 - q and the supply curve is P = Q. Find the equilibrum price and quanity. Calucate consumer and producer surplus. Suppose that the governement imposes a price cap of 30. Show the effect graphically and calculate the resulting consumer surplus, producer surplus and deadweight loss.

Solution

At equilibrium.

Demand = Supply

100 - Q = Q

Q = 100 /2

Q = 50

P = 100 - 50 = 50

Conclusion:- Equilibrium price = $ 50 and equilibrium quantity = 50 Units

Calculation of consumer surplus:-

= 1/2 * Height * Base [ Using the maximum price of $ 100 as the height and the maximum units purchased of 50 as the base.]

= 1/2 * 100 * 50

= 5000 / 2

= $ 2500

Conclusion:- Consumer surplus = $ 2500 [In other words, the consumers receive a surplus of $ 2500 from participating in this market.]

Calculation of producer surplus:-

= 1/2 * Height * Base [ Using the price of $ 50 as the height and the maximum units purchased of 50 as the base.]

= 1/2 * 50 * 50

= 2500 / 2

= $ 1250

Conclusion:- Producer surplus = $ 1250