Market Price in intervention

Question

Let’s take a perfectly competitive market in which the market demand curve is provided by Q^d = 20 − 2P^d and the market supply curve is provided by Q^s = 2P^s.

a) Determine the equilibrium price and quantity in the lack of government intervention.

b) Assume that the government obliges a price ceiling of $3 per unit. How much is supplied?

c) Assume that, as an alternative, the government obliges a production quota restricting the quantity supplied to 6 units. Determine the market price beneath this kind of intervention? Is the quantity supplied beneath the price ceiling bigger than, less than, or similar as the quantity beneath the production quota?

Answer 1

a) Letting P = Pd = Ps stand for the market price in the lack of government intervention, we encompass: 20 – 2P = 2P => P = 5. Therefore the equilibrium quantity is 10 units.

b) The quantity supplied beneath a price ceiling of $3 per unit is 6 units.

c) The market-clearing price whenever a production quota of 6 is obliged is provided by 6 = 20 – 2P or P = 7.