Suppose that the market for cigarettes is initially in equilibrium and is perfectly competitive.The demand curve can be expressed as ; the supply curve can be expressed as 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

Suppose that the market for cigarettes is initially in equilibrium and is perfectly competitive.The demand curve can be expressed as  ; the supply curve can be expressed as  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.

Quizplus · Accepted Answer

With the production quota in place, the quantity supplied will be fixed at 30 million boxes per month, shown on the supply curve as a vertical line at Q = 30. At the original equilibrium price, P = $1.00, the new quantity demanded will be 60 million boxes per month. Therefore, there will be an excess supply of 30 million boxes per month, indicated by the vertical distance between the supply curve and the quantity demanded curve at Q = 30.

Suppose That the Market for Cigarettes Is Initially in Equilibrium