An Example of Government Intervention

Suppose that the demand for cars in Australia is given by

Q= 400 - 0.4P, and the supply is given by Q= 0.4P.

A. Illustrate the market equilibrium on a graph. (Calculate and clearly label the equilibrium price and quantity.)

B. Calculate the consumer surplus, producer surplus and total economic surplus of the market when it is in equilibrium.

C. The Australian Government, wanting to protect consumers, imposes a price ceiling of $125. Using your graph, show and explain how this this intervention will affect the quantity supplied and demanded in this market.

D. Illustrate on your graph the consumer surplus and the deadweight loss in this market with the price ceiling. Overall, has the policy made consumers better or worse off? Are allconsumers better off? Explain your answer.

(You can draw the graph, take a picture and attach it here. Please do *not* take a picture of your hand-written answer, it is much easier for your marker to read typed text)