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 ceiling of 6 is imposed. What is the new equilibrium quantity transacted in the market?
c. How does the price consumers pay (including any marginal effort costs) compare to the price firms receive?
d. What is the total cost of the additional effort exerted by consumers?
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 equation, we get p*=10.
b. Under a price ceiling, the equilibrium quantity is determined by the supply curve. The new equilibrium quantity is therefore 6.
c. Consumers pay a price that will clear the market at the new equilibrium quantity of 6. Plugging 6 in for x in the demand curve, we get a consumer price of 18. Thus consumers pay 18 (including marginal effort costs) while firms receive 6.
d. The total effort cost is the marginal effort cost times the quantity transacted. The marginal effort cost is the difference between the price consumers pay (18) and the price firms receive (6) -- i.e. 12. The quantity is 6. Thus, the total effort cost on the part of consumers is 6(2)=72.
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