Homework Sourse00 osr 02 00S 008 002 00A 08 ose 02 2rs 0ds OES 00S 0ar Ocd
Solution
Answer:
Theequilibrium price is the price where supply and demand meets. Theequilibrium price on this schedule is at $5, and the quantity is300.
Thesituation at a price of $10 is a surplus of 975 - 150 = 820. Atthis price the consumer are only willing to consume150 of thecommodity leaving a surplus.
Areduction in price will increase the quantity demanded therebydecreasing the quantity supplied.
At a priceof $2 there is a shortage of 400 - 120 = 280, here the demand isgreater that supply.
When thegovernment impose a a minimum price of $7 in the exercise, there isa price floor occuring; at this the price cannot go below thegovernment imposed price.
Theoriginal equilibrium price was $5, now with the government imposeprice it has increased to $7 giving a surplus of 500 - 260 = 240.The price floor interferes with the function of the market, the governmentimposing of $7 price means the price has to stay at the price itcannot go down. This means more of the product is being producedthan it is consumed.
The pricefloor is the price above the equilibrium price which in turns givessurplus.
The priceceiling is the price below the equilibrium price which in turnsgives shortage.
In orderto have effective price floor, the price has to be set above theequilibrium price. With price ceiling the demand will be more thansupply, which means
there willbe shortage of the product, more people are n demand for it. Inorder to accomomdate the shortage there will be a rationing systemof the product toaccommodate the increase in demand. Effective price ceiling is theprice below the equilibirum; any price below the equilibrium of theoriginal $5 will be effective.
