Question

extra-strength headache pills sold in a country.

Price (per pill) Qd (thousand) Qs (thousand)

1.5 20 0

2.0 15 6

2.5 10 10

3.0 7 13

3.5 5 15


Assume that consumers of the extra-strength headache pill lobby the government, to say that the equilibrium price of these pills is too high. Assume the government accepts the consumers argument.

a) Will the government introduce a price floor or a price ceiling policy?

b) Will the government legislate a price of $2.00 per pill or $3.00 per pill?

c) At this legislated price, will there be a shortage or surplus of pills?

d) How much of a shortage or surplus?

Answer 1

A graph of Price against Quantity demanded/supplied

The equilibrium price and quantity is given as follows:

Equilibrium price: $2.5

Equilibrium quantity demanded and supplied: 10 thousand.

a) Will the government introduce a price floor or a price ceiling policy?

The government will introduce a price ceiling policy. The price of $2.00 per pill will be the maximum price that the government will set in order to make the extra-strength headache pill affordable to the consumers.

b) Will the government legislate a price of $2.00 per pill or $3.00 per pill?

The government will legislate a price of $2.00 per pill because it is the price below the equilibrium price of $2.5 per pill.

c) At this legislated price, will there be a shortage or surplus of pills?

At the price of $2.00 per pill, the quantity demanded will be equal to 15 pills while the quantity supplied will be equal to 6 (QD>QS). In this case, there will be excess demanded and shortage in supply of pills. 

d) How much of a shortage or surplus?

At the price of $2.00, the shortage in supply of the pills will be equal to (15 – 6 = 9 pills).