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Assume that the market for gasoline can be represented by the following demand and supply functions: QD = -2P+24, and Qs = 10P, where


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Assume that the market for gasoline can be represented by the following demand and supply functions: QD = -2P+24, and Qs = 10P, where P is the price per gallon, and QD and Qs each represents quantity of gasoline (in millions of gallons) of gasoline consumed and supplied every year. Assume that the market clears in the sense that QD = Qs. (1) Calculate price and quantity of gasoline under equilibrium. (2) In order to support producers the government sets a minimum price $2.50 per gallon. What is the new quantity of gasoline supplied to the market? Use a graph of the supply and de- mand lines to illustrate your answer, showing the original equilibrium price and quantity from part (1) and the new quantity supplied at the price ceiling (note that the vertical axis needs to be price and the horizontal axis needs to be quantity). (3) Given the equilibrium price and demand (denoted by Po and Qo), the consumer surplus (CS) is defined as CS(Qo) = P(Q)dQ - PoQo, where P(Q) is determined by the demand function. Calculate the consumer surplus in equi- librium. (4) Given the equilibrium price and demand, the producer surplus (PS) is defined as PS(Qo) PoQo- P(Q)dQ, where P(Q) is determined by the supply function. Calculate the producer surplus in equi- librium. = - (5) The sum of consumer surplus and producer surplus under the minimum price will be differ- ent from the sum of consumer surplus and producer surplus in equilibrium. Will the former sum increase or decrease in comparison to the latter sum? Give your reason(s). (6) If the government provides $2.50 per gallon to purchase any excess gasoline that suppliers make available to the market but are unable to sell to consumers, how much gasoline must the government buy?

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1 To find the equilibrium price and quantity we set the quantity demanded equal to the quantity supplied QD QS 2P 24 10P Adding 2P to both sides 24 12P Dividing both sides by 12 P 2 Now substitute the ... blur-text-image

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