Calculating effect of a price ceiling - example
Assume a linear demand function of the form:
Qd = 95 - 5P
and a linear supply curve of the form:
Qs = -40 + 10P
Using these demand and supply functions, answer the following questions. Once you have had a go at the questions, follow the link below to compare your answers.
- Calculate the quantities demanded and supplied for prices from $1 - $15.
- Plot these figures to give the demand and supply curves for the product.
- Using simultaneous equations, calculate the equilibrium price and output.
- The government then imposes a price floor of $4 on the market. Show this on the diagram.
- Calculate the excess supply as a result of this price floor.
- Calculate the level of consumer expenditure:
- before the price floor was imposed
- after the price floor was imposed
- Calculate how much the government would have to spend to purchase the excess supply as a result of the price floor.