1. Suppose the market for face masks is perfectly competitive, with equilibrium price per mask P* and quantity sold Q*

. The demand and supply curves for masks are shown in the diagram

below. Consumers are upset about paying the price P*, which they think is too high. In

response to their complaints, the government is imposing a price ceiling of P

a) If the price ceiling is the only policy instrument the government uses, show the new market

equilibrium in the short run on a diagram like the one below. Additionally, show the change

in consumer surplus and producer surplus as a result of the price ceiling.

b) Is the new market equilibrium more efficient or less efficient than the original competitive

equilibrium? Explain why the change represents a gain or loss to society.

Using the same market for face masks, suppose now that in addition to the price ceiling

described above, the government mandates that producers supply the amount Q* at the price

P

c) Using another diagram like the one below, show the new market outcome (P,Q*) that

results from these two policy instruments. Additionally, show the change in producer surplus

that results from the new price ceiling, relative to the original competitive equilibrium.

d) Is the new market outcome more efficient or less efficient than the original competitive

equilibrium?

e) Briefly discuss what you think the long run effects of the two different policies (price ceiling only and price ceiling plus quantity mandate) might be in this market.