Chapter 2, Problem 8CACQ

To determine

(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 price ceiling on the economy.

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.

$\begin{array}{c}\text{Full}\text{economic}\text{price= Price}\text{what}\text{is}\text{actually}\text{paid}+\text{Opportunity}\text{cost}\\ =\text{\$6}+\left(\$12-\$6\right)\\ =\$12\end{array}$

Economics Concept Introduction

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.

To determine

(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 price floor on the economy.

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 equilibrium price, then quantity demanded by consumers is less while sellers want to sell more of commodities as they earn higher profits. The shaded area in the above figure shows the amount of unsold goods or surplus goods which firms want to sell but are not able to sell because of its high price. Shaded area is in the form of rectangle which is unsold goods or surplus goods. When government purchases this surplus amount then cost of government will be:

$\text{Cost}\text{of}\text{government}=\left(\begin{array}{c}\text{Price}\text{of}\text{commodity}\text{after}\text{price}\text{floor}\\ \times \text{Quantity}\text{of}\text{unsold}\text{goods}\end{array}\right)$

$\begin{array}{c}\text{Cost}\text{of}\text{government}\text{=}12\times \left(2.5-1\right)\\ =12\times 1.5\\ =\$18\end{array}$

Economics Concept Introduction

Price floor:

Price floor is the maximum price which government has imposed above which goods are sold in the market.

To determine

(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.

Economics Concept Introduction

Excise tax:

An excise tax is a tax imposed on manufacturers for producing goods.

To determine

(d)

To explain:

The level of consumer and producer surplus.

Answer to Problem 8CACQ

The value of consumer surplus is $4, and the value of producer surplus is $8.

Explanation of Solution

When demand curve D and supply curve S⁰ intersects then equilibrium is attained at price of $10 while equilibrium quantity is attained at 2 units.

Consumer surplus is the below demand curve and above the price level $10. So, consumer’s surplus is equal to:

$\begin{array}{c}\text{Consumer}\text{Surplus}=\frac{1}{2}\times \text{base}\times \text{height}\\ =\frac{1}{2}\times 2\times \left(14-10\right)\\ =\frac{1}{2}\times 2\times 4\\ =\$4\end{array}$

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:

$\begin{array}{l}\text{Producer}\text{Surplus}=\frac{\text{1}}{\text{2}}\times \text{base}\times \text{height}\\ =\frac{1}{2}\times 2\times \left(14-10\right)\\ =\frac{1}{2}\times 2\times 4\\ =\$4\end{array}$

Thus, the value of producer surplus is $4.

Economics Concept Introduction

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.

To determine

(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.

Economics Concept Introduction

Price ceiling:

Price ceiling is the maximum price imposed by a government below which goods are supplied.