Multiple Choice
The supply and demand curves for a product are as follows. What is producer surplus in this market?
QD = 45 – 2P
QS = -15 + P
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5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Quantitative Analysis of Consumer and Producer Surplus at Equilibrium
Multiple Choice
The supply and demand curves for a product are as follows. What is consumer surplus in this market?
QD = 45 – 2P
QS = -15 + P
A
6.25
B
12.5
C
20
D
22.5
E
25
Verified step by step guidance1
Identify the equilibrium point by setting the quantity demanded (QD) equal to the quantity supplied (QS). This means solving the equation 45 - 2P = -15 + P.
Rearrange the equation to find the equilibrium price (P). Combine like terms to isolate P on one side of the equation.
Once you have the equilibrium price, substitute it back into either the demand equation (QD = 45 - 2P) or the supply equation (QS = -15 + P) to find the equilibrium quantity.
Calculate the consumer surplus, which is the area of the triangle formed above the price level and below the demand curve up to the equilibrium quantity. The formula for consumer surplus is (1/2) * base * height, where the base is the equilibrium quantity and the height is the difference between the maximum price consumers are willing to pay (from the demand curve) and the equilibrium price.
Determine the maximum price consumers are willing to pay by setting QD to zero in the demand equation and solving for P. Use this price to calculate the height of the consumer surplus triangle.
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