Question 3 (i)(b)
A price floor of $108 with Qs = 2P and Qd = 360 - P
3 marks
- Time to write
- About 6 minutes
Question
Question 3 (i)(b) · 3 marks- The equations of supply and demand are given as following:
Q^s^ = 2P, Q^D^ = 360-P
- If the government imposes a price floor of $108, what are the price, quantity demanded, quantity supplied and the size of shortage or surplus.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
What the paper leaves open
"given as following" is as printed.
Write it in this order
- 1 Equilibrium price and quantity 1 mark 2 min
- 2 Floor below equilibrium: not binding, with the reason 1½ marks 3 min
- 3 Price, quantities, no shortage or surplus ½ mark 1 min
Short on time? Step 2 carries 1½ of the 3 marks: guard its minutes.
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Free-market equilibrium. 2P = 360 - P gives P = $120 and Q = 240 units.
Is the floor binding? A price floor is a legal minimum price; it is set to keep the price from falling below a level, and it creates a surplus only when it lies above the equilibrium price. Here the floor of $108 is below the equilibrium price of $120. The law forbids prices below $108, but the market price is $120 anyway, so the floor does not restrict anything: it is not binding.
| Item | Value |
|---|---|
| Price | $120 (the market price, above the floor) |
| Quantity demanded: 360 - 120 | 240 units |
| Quantity supplied: 2 x 120 | 240 units |
| Shortage or surplus | none (0) |
Answer. The price stays at the equilibrium of $120, quantity demanded and quantity supplied are both 240, and there is neither a shortage nor a surplus. A floor of $108 would matter only if demand fell or supply rose enough to push the market price below $108.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Equilibrium price and quantity | 1 |
| 2 | Floor below equilibrium: not binding, with the reason | 1.5 |
| 3 | Price, quantities, no shortage or surplus | 0.5 |
| Total | 3 |
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