(a)
To find:
The shortage and full economic price.
Answer to Problem 8CACQ
There is shortage of three units and thefull economic price is $12.
Explanation of Solution
The diagram given below shows the effect of
When demand curve is D and Supply curve is S0, then equilibrium is attained when price of commodity is $10 and the quantity demanded is 2 units. When government imposed the price ceiling of $6 then quantity demanded is 2 units. When government imposed the price ceiling of $6 then quantity demanded is greater than the quantity supplied so there is shortage of goods in an economy. Thus, there is shortage of 3 units.The shaded area in the diagram shows the shortage of goods in an economy.
Full economic price is the total amount paid by the consumer in getting the product.
Price ceiling:
Price ceiling is the minimum price imposed by a government below which goods are supplied.
Full economic price:
Full economic price is the total amount paid by the consumer in getting the product below the imposed price ceiling.
(b)
To find:
The surplus as a result of imposition of $12 as price support and costs to the government in purchasing the units and all unsold units.
Answer to Problem 8CACQ
The costs to the government in purchasing units is $12.
Explanation of Solution
The diagram given below shows the effect of
When demand curve is D and Supply curve is S0then equilibrium is attained when price of commodity is $10 and quantity demanded is 2 units. When government imposed the price floor of $12, then quantity supplied is greater than the quantity demanded so there is surplus of goods in an economy. Thus, there is surplus of 1.5units.
The shaded area in the diagram shows the surplus of good in an economy.
When price of commodity is more than the
Price floor:
Price floor is the maximum price which government has imposed above which goods are sold in the market.
(c)
To find:
The equilibrium price after excise tax of $6 is imposed, the price received by producers and the number of units that are sold.
Answer to Problem 8CACQ
The price paid by consumer is $12 per unit while the price received by the producer is $6 per unit. The number of units sold is 1 unit.
Explanation of Solution
When equilibrium price is $10 and government imposes excise tax of $6, then supply curve will shift leftwards from S0 to S1,which leads to rise in equilibrium price from $10 to $12. At equilibrium price of $12, quantity demanded is 1 unit.
The price paid by consumer is $12 per unit while the price received by the producer is $6 per unit. The number of units sold is 1 unit.
Excise tax:
An excise tax is a tax imposed on manufacturers for producing goods.
(d)
To explain:
The level of
Answer to Problem 8CACQ
The value of
Explanation of Solution
When demand curve D and supply curve S0 intersects then equilibrium is attained at price of $10 while
Consumer surplus is the below demand curve and above the price level $10. So, consumer’s surplus is equal to:
Thus, the value of consumer surplus is $4.
Producer surplus is the area above curve and below the price level $10. So, producer’s surplus is equal to:
Thus, the value of producer surplus is $4.
Consumer surplus:
Consumer surplus is the variance in the amount that consumers are ready to pay and the price which is actually paid by them. The area of consumer surplus is below the demand curve and above the price.
Consumer surplus:
Producer surplus is the variance in the amount at which producers accept the quantity and the amount at which they sell. Producer surplus is the area above curve and below the price level.
(e)
To explain:
Whether the price can be benefitted with the price ceiling of $2.
Explanation of Solution
When price ceiling is $2 then producers do not want to produce any commodity while consumers want to consume any commodity which is produced.
At price of $2, all consumers will benefit if producers supply commodity but at this low-price firms are not interested to produce any commodity.
Price ceiling:
Price ceiling is the maximum price imposed by a government below which goods are supplied.
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Chapter 2 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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