Question:
Demand ($Q_D$) = 60 – 2P, Supply ($Q_S$) = -20 + 3P. Suppose the government imposes a minimum price equal to Rs. 20 per unit. Then, this will
(1) lead to an excess supply in the market equal to 20 units.
(2) lead to an excess supply in the market equal to 28 units.
(3) lead to an excess demand in the market equal to 28 units.
(4) lead to an excess demand in the market equal to 20 units.
(5) have no effect on the market.
Correct Answer:
(1)
Answer Explanation:
First, check free market equilibrium: $60 – 2P = -20 + 3P rightarrow 5P = 80 rightarrow P = 16$. Since the minimum price (20) is above equilibrium (16), it is effective. Plug P=20 into both equations: $Q_D = 60 – 2(20) = 20$. $Q_S = -20 + 3(20) = 40$. Excess Supply (Surplus) = $Q_S – Q_D = 40 – 20 = 20$ units.
Topic: Price Controls Year: 2017
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