Q: If the supply curve in the first graph is $$P = Q$$ and the demand curve is $$P = 8 - Q$$, what is the consumer surplus at equilibrium?

$$CS = \frac{1}{2} (8 - 4) \times 4 = 8$$

Question 1

A competitive market is depicted in the first graph, where a price floor $$P_w = 6 is $$imposed. If the equilibrium price without the price floor is below $$6$$, what is the likely effect on consumer surplus after the price floor is imposed?

Accepted Answer

Consumer surplus will decrease because consumers pay a higher price and buy less.

Question 2

Refer to the first graph. If the government imposes a price floor at $$P_w = 6$$, what is the deadweight loss (DWL) if the total social surplus before the price floor is $$23$$ and after is $$8$$?

Accepted Answer

$$DWL = 23 - 8 = 15$$

Question 3

In the first graph, if the supply curve is perfectly elastic at $$P = 6$$, what would be the effect of a price floor set at $$P = 6$$?

Accepted Answer

There would be no effect, as the market price is already at the floor.

Question 4

Suppose the demand curve in the first graph is given by $$P = 8 - Q$$ and the supply curve is $$P = Q. $$What is the equilibrium price and quantity?

Accepted Answer

$$P^* = 4, \ Q^* = 4$$

Question 5

In the second graph, a monopolist faces a demand curve $$P = 100 - Q$$ and a constant marginal cost $$MC = 80. $$What is the monopoly quantity and price?

Accepted Answer

$$Q^* = 10, \ P^* = 90$$

Question 6

Based on the second graph, what is the deadweight loss (DWL) from monopoly if the competitive quantity is $$Q_c = 20$$ and the monopoly quantity is $$Q_m = 10$$?

Accepted Answer

$$DWL = \frac{1}{2} (90 - 80)(20 - 10) = 50$$

Question 7

If the government provides a per-unit subsidy of $$s to $$the monopolist in the second graph, what value of $$s$$ will eliminate the deadweight loss?

Accepted Answer

$$s = 20$$

Question 8

In the context of the second graph, what is the effect of a lump-sum subsidy of $$600 on $$the monopolist’s output and market efficiency?

Accepted Answer

It increases profit but does not change output or market efficiency.

Question 9

Suppose the marginal revenue (MR) curve in the second graph is $$MR = 100 - 2Q. At $$what quantity does the monopolist set $$MR = MC if$$ $$MC = 80$$?

Accepted Answer

$$100 - 2Q = 80 \implies Q = 10$$

Question 10

If the government sets a price ceiling at $$P = 80 in $$the monopoly market depicted in the second graph, what will be the resulting quantity sold?

Accepted Answer

$$Q = 100 - 80 = 20$$

Question 11

In the first graph, if the government removes the price floor and allows the market to reach equilibrium, what happens to the deadweight loss?

Accepted Answer

Deadweight loss is eliminated.

Question 12

If the supply curve in the first graph is $$P = Q$$ and the demand curve is $$P = 8 - Q$$, what is the consumer surplus at equilibrium?

Accepted Answer

$$CS = \frac{1}{2} (8 - 4) 	imes 4 = 8$$

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