Suppose that the aggregate supply function for a good is S(P) = 10 + P and the aggregate demand function is D(P) = 40 − P. Suppose that the market for the good is perfectly competitive.
i) Solve for the equilibrium price and quantity.
ii) Now, suppose that the government tries to restrict the industry to selling only 20 units. At what pricewould 20 units be demanded (P^D) ? At what price would 20 units be sold (P^S)?
iii) What is the total deadweight loss from restricting the supply to 20 units? (Hint: It might help to thinkthrough the problem graphically).