The market demand function for wheat is Q^d = 10

Question

The market demand function for wheat is Q^d = 10 - 2P and the market supply function is Q^s = 4P - 2,both measured in billions of bushels per year.Suppose the government wants to increase the price of wheat to $3/bushel and they impose a voluntary production reduction program to achieve their goal.What is the size of the consumer surplus?

Quizplus · Accepted Answer

The consumer surplus is calculated as the area of the triangle above the price level and below the demand curve. At P = $3, Q^d = 10 - 2(3) = 4. The equilibrium price without intervention is found by setting Q^d = Q^s: 10 - 2P = 4P - 2, solving gives P = $2 and Q = 6. The consumer surplus at P = $3 is (1/2) * (6 - 4) * (5 - 3) = $4 billion.

The Market Demand Function for Wheat Is Qd = 10