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

With the production quota of 30 million boxes per month, supply is limited to Q = 30. At the initial equilibrium, demand is Q=60-P. Setting supply equal to demand yields:
$0.5Q = 60 - Q \quad \Rightarrow \quad Q = 40$
With the quota, however, only 30 million boxes can be produced, resulting in an excess supply of Q = 40 - 30 = 10 million boxes. Therefore, the correct answer is (C), there is an excess supply of Q = 30.

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 $P = 60 - Q ^ { d }$