Problem
Imagine that a market for a good is characterized by the following supply and demand equations: QS = -35 + 35P QD =100 - 10P
where QS and QD are quantities in units and P is the price per unit.
I. Graph the supply and demand curves with quantity on the horizontal and price on the vertical axis. Be sure to calculate the P and Q intercepts for demand and the P intercept for supply. Calculate and illustrate the equilibrium price and quantity. [Hint: Show your work.]
II. Calculate both the demand and supply elasticity around the equilibrium point. [Hint: you can use either the point method or the average arc (midpoint) method.]
III. If a regulator imposes a quantity restriction by granting quotas for 60 units of output to existing producers, what is the new price and quantity traded? Does this policy create deadweight loss (DWL) in the market? Briefly explain and identify any DWL in your diagram.
IV. What is the value of a unit of quota? Illustrate in your diagram. What is the total value of all units of the quota?