Answer to Question #268470 in Microeconomics for Anu

Question #268470

a) If the government imposes a $20 floor price for this good or service, would a surplus or deficit situation ensue on this market? If yes, what is the dollar value of this surplus or deficit? 

b) If the government substitutes a $2 subsidy for the $20 floor price in b), explain how that would affect the demand and/or supply and determine the new equilibrium price and quantity. 


1
Expert's answer
2021-11-22T09:20:12-0500

a)A surplus would ensue since the quantity supplied will exceed quantity demanded.


Let "\\$x" be the dollar value before the surplus; after the surplus, the dollar will have a value of

"\\$(x+20)"


b)Because of the "\\$2" subsidy, the demand will increase since consumers are able to consume more at a lower price. There will be an increase in supply too since producers are able to sell more at a higher price.


Let the original price P ;

After the subsidy, the equilibrium price will become "\\$(P+2)"


Let original quantity be Q. After the subsidy, the quantity will increase by say x.

Hence the equilibrium quantity will be; "(Q+x)" units


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