Consider a market whose supply and demand curves are given by P = 4Q ^S and P = 12 - 2Q^D.
a) Calculate the equilibrium price and quantity (P* and Q*) assuming the market is unregulated. What is the total surplus at the equilibrium?
b) Suppose the government impose a price ceiling of Pc = $4. What is the quantity supplied at that price? What is the quantity demanded? Is this a shortage or a surplus? How large is it? (Also show it in diagram)
c) Indicate the area of CS, PS and the deadweight loss of the market with the price ceiling of Pc=$4 in diagram.
d) Suppose instead of the price ceiling, the government decides to impose a tax of $6 on sellers. Indicate after-tax price buyers pay, the after-tax price sellers receive, and the quantity traded in the market after tax imposed in the diagram. Appropriately indicate the CS, PS, tax revenue and the deadweight loss of the market with tax in diagram.
e) Calculate the price elasticity of demand at the equilibrium. Is this result elastic or inelastic?