Suppose that the market demand curve is 
and the market supply curve is 
.
a. Calculate the equilibrium price and output level.
b. Suppose a price floor of 16 is imposed in this market. What is the new equilibrium quantity transacted in the market?
c. How does the price that firms receive -- net any additional marginal effort costs they incur -- compare to the price consumers pay?
d. What is the total cost of the additional effort firms have to exert in equilibrium?
What will be an ideal response?
b. Under a price floor, the new equilibrium quantity is determined by the demand curve. Solving the equation
, we get the new equilibrium quantity of 7.c. Consumers pay the price floor of 16. Firms pay the price that clears the market for the new equilibrium quantity of 7 -- i.e. we can calculate the firms' net-of-additional-MC price as 7 (since the supply curve is p=x.)
d. The marginal effort cost is the difference between the price floor of 16 and the net-of-effort price 7 that firms receive -- i.e. the marginal effort cost is 9. The total effort cost firms incur is then the quantity times the marginal effort cost -- i.e. 7(9)=63.
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