Consider the market for airlines where the market demand and market supply curves are given by the equations

below. P is the price of Q and Q is the number of seats: Market Demand: = 1,000 - 2

Market Supply: = 3 45

1. Calculate the equilibrium price and quantity in this market. Then, draw a graph illustrating this market. Label your graph and show all critical points (3 points)

2. Calculate the producer surplus (PS). (2 points)

3. Because of Covid-19 guidelines, local government set a price floor that generates a surplus of 85 seats.

Find this price floor. (2 points)

4. To help the airline industry, the government decides to purchase the surplus generated in the previous

question. Answer the following questions:

A. Find the government cost due to the surplus purchase and graph. (2 points)

B. Calculate the new producer surplus (PS). (2 points)

C. Calculate the dead weight loss (DWL). (2 points)