Assume the market for home pest control services (spraying to kill unwanted bugs and creepy crawlies around the exterior of your home) is perfectly competitive and is currently in equilibrium.
a. Draw a carefully labeled graph, showing the supply and demand in the market. Show the following on your graph:
i. the equilibrium price and quantity, labeled as Pe and Qe.
ii. the area showing the consumer surplus, labeled as CS.
iii.the area showing the producer surplus, labeled as PS.
b. Assume that an effective price ceiling is imposed by the government at Pc which is less than Pe. Show the ceiling price on your graph and discuss the following:
i. what will the result be of the ceiling?
ii. what will happen to the consumer and producer surpluses you identified above.
c. Now assume that the price ceiling is abolished but that the industry is taken over by "Gotnobugs," a large firm that forms a monopoly in the home pest control market. Draw a new graph showing the new price and quantity equilibrium and compare the results under monopoly with those in part a, above.