Consider a perfectly competitive market in which the market demand curve is given by Qd = 20 − 2Pd and the market supply curve is given by Qs = 2Ps.
a) Find the equilibrium price and quantity in the absence of government intervention.
b) Suppose the government imposes a price ceiling of $3 per unit. How much is supplied?
c) Suppose, as an alternative, the government imposes a production quota limiting the quantity supplied to 6 units. What is the market price under this type of intervention? Is the quantity supplied under the price ceiling greater than, less than, or the same as the quantity under the production quota?
d) Assuming that under price controls rationing is as efficient as possible and under the quota, the allocation is as efficient as possible, under which program is the deadweight loss larger: the price ceiling or the production quota?
e) Assuming that under price controls rationing is as inefficient as possible, while under the quota the allocation is as efficient as possible, under which program is the deadweight loss larger: the price ceiling or the production quota?
f) Assuming that under price controls rationing is as inefficient as possible, while under the quota the allocation is as inefficient as possible, under which program is the deadweight loss larger: the price ceiling or the production quota?