Supply and Demand; Applications of Supply and Demand; Elasticity.

Consider a market for Lemonheads, a candy that is crucial to the development of economics papers. The market is defined by the following quantity equations:

Equation 1: Q = 50 + 5P

Equation 2: Q = 110 - P

a) Your professor (who, as noted above, is a philosopher who was mistakenly hired as an

economist) is unsure what these equations mean. In as much detail as necessary, explain what each equation means and how it is useful in determining conditions in the market.

b) Sketch the curves. Label consumer surplus, producer surplus, and deadweight loss (if any).

c) Using the equations, find the equilibrium in the market for Lemonheads. Write a sentence explaining the method you used.

d) The government decides to impose a price ceiling of $8 per box of Lemonheads to make Lemonheads more affordable for economists and thereby increase the supply of economics papers. What will happen in the market for Lemonheads?

e) Draw a second supply-and-demand diagram. Show the effect of the price ceiling. Label consumer surplus, producer surplus, and deadweight loss (if any).

f) Did the price ceiling achieve its intended goal of making Lemonheads more affordable? Explain both the positive and negative consequences of the policy.

g) Use the midpoint method to answer the following question: When the price rises from $5 to $10, calculate the price elasticity of demand. Is demand elastic, unit-elastic, or inelastic?

h) Use the midpoint method to answer the following question: When the price rises from $80 to $85, calculate the price elasticity of demand. Is demand elastic, unit-elastic, or inelastic?