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?


a. Setting demand equal to supply, we get x*=10; plugging this back into either the demand or supply curve equations, we get p*=10.



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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