Suppose that the market for cigarettes is initially in equilibrium and is perfectly competitive. The demand curve can be expressed as $P = 60 - Q ^ { d }$; the supply curve can be expressed as $P =$ $0.5 Q ^ { s }$. Quantity is expressed in millions of boxes per month. Now suppose that the federal government imposes a production quota on cigarettes of 30 million boxes per month. What is the level of excess supply in this market?
A) There is no excess supply. There is an excess demand of $Q = 30$.
B) There is no excess supply or demand.
C) There is an excess supply of $Q = 30$.
D) There is an excess supply of $Q = 20$.

Question

Quizplus · Accepted Answer

The imposition of a production quota will reduce the supply in the market. The new supply curve becomes $P=0.5Q^{s }$ with a maximum quantity of 30 million boxes per month. The new equilibrium price will be where the reduced supply curve intersects the original demand curve: 
$$60-Q_{d}=0.5Q_{s}$$
$$60-Q_{d}=0.5(30)$$
$$Q_{d}=45$$
Therefore, at the quota level of 30 million boxes, there will be excess supply of:
$$Q_{s}-Q_{d}$$
$$30-45=-15$$
which means there will be an excess supply of 15 million boxes per month (or equivalently, 0.015 boxes per month). So the correct answer is C. With the production quota, the new supply curve is a vertical line at 30 million boxes per month. At the equilibrium price, the quantity demanded is $60 - P$, which is $60 - (0.5 \times 30) = 45$ million boxes per month. However, producers are only able to supply 30 million boxes per month due to the quota, resulting in an excess supply of $45 - 30 = 15$ million boxes per month. Therefore, the correct answer is C, as there is an excess supply of 15 million boxes per month.

Suppose That the Market for Cigarettes Is Initially in Equilibrium P=60−QdP = 60 - Q ^ { d }P=60−Qd

Suppose That the Market for Cigarettes Is Initially in Equilibrium $P = 60 - Q ^ { d }$