Question 3. Market for Face Masks (20 marks)

Solve the following problem. Show your work step by step. Keep your explanations short and concise

The COVID-19 pandemic has created a market for a product that most of us hardly ever considered buying a year ago: face masks.

Assume that the demand and supply for reusable face masks in a small town are given by the following equations:

D: Q^D = 1800 - 50P

S: Q^S = -180 + 40P

a)Draw the demand and supply diagram for face masks by finding the D and S intercepts. Explain what the vertical intercepts of the D and S curves represent. (5 marks)

b)Solve for the equilibrium price and quantity of face masks. Show these equilibrium values and equilibrium point on your diagram(5 marks)

The local council is concerned that some people are not wearing face masks because they cannot afford them. They would like people to buy (and wear) 1000 face masks.

c)How much should the price be in order for the quantity demanded of face masks to increase to 1000?(2 marks)

One city councillor suggests that the council should require producers to sell face masks at the price found in part (c), in order to boost the quantity demanded. Other councillors argue that fixing the price would not help increase the number of people wearing masks.

d)What is the name of the policy that puts a maximum cap on the market price? (1 mark)

e)If the price is capped at the value suggested above, how many masks will producers supply at this price? What would be the shortage of masks?(2 marks)

After consulting with a group of economists, councillors find a solution to boost the number of face masks people buy and wear. They will pay sellers a subsidy for each mask produced in order to boost their price and incentivize them to increase their quantity supplied.

f)How much should the price be in order to convince sellers to supply the quantity of 1000 face masks?(2 marks)

The subsidy that the city will have to pay is the difference between the price that producers need in order to supply 1000 face masks and the price that buyers need in order to demand 1000 face masks.

g)What is the subsidy that the city council must pay per face mask? What is the total cost for the city (the total subsidy) for all the face masks they want to see people wearing?(3 marks)