Suppose in a market with Q^d = 100 - 5P and Q^s = 5P, the government imposes a price floor of $15. If the government is required to purchase any excess supply at the price floor, how much will the government have to pay to purchase the excess in this market? A) Nothing; there is no surplus B) $1,000 C) $1,500 D) $750

Question

Quizplus · Accepted Answer

To find the excess supply, set the price floor of $15 equal to the supply curve: 5P = 15 P = 3 At $3, quantity supplied is: Q^s = 5P = 5(3) = 15 At $15, quantity demanded is: Q^d = 100 - 5P = 100 - 5(15) = 25 Therefore, there is excess supply of: Excess = Q^s - Q^d = 15 - 25 = -10 Since there is an excess supply, the government must purchase it at the price floor of $15. The quantity of excess supply is 10 units, so the government will have to pay: Payment = Price floor x Quantity excess = $15 x 10 = $150

Suppose in a Market with Qd = 100 - 5P

Suppose in a Market with Q^d = 100 - 5P