Consider a market characterized by the following inverse demand and supply functions: P_X = 10 − 2Q_X and P_X = 2 + 2Q_X. An $8 per unit price floor will result in a:

Question

Quizplus · Accepted Answer

To find the effect of a price floor, we first determine the equilibrium price and quantity without any price controls. Setting the demand equal to supply: $10 - 2Q = 2 + 2Q$. Solving for $Q$ gives $Q = 2$. At this equilibrium quantity, the price is $10 - 2*2 = 6$. An $8 price floor is above the equilibrium price, meaning it will be binding. To find the quantity supplied and demanded at this price floor, we substitute $P = 8$ into the demand and supply functions. For demand: $10 - 2Q = 8$, solving for $Q$ gives $Q = 1$. For supply: $2 + 2Q = 8$, solving for $Q$ gives $Q = 3$. Therefore, at a price floor of $8, there will be a surplus of $3 - 1 = 2$ units.

Consider a Market Characterized by the Following Inverse Demand and Supply