The market demand and supply for cheese are given by the following (inverse) demand and supply functions (where is the price of cheese in dollars and is the quantity of cheese demanded, is the quantity of cheese supplied and the quantity of cheese is always measured in kilograms):

Market demand: = 10 0.5

Market supply: = 2 + 0.75

Assume the market for cheese is a perfectly competitive market.

a)What is the equilibrium price and quantity in this market? Illustrate your answer with a diagram.

b)Explain what is meant by the term 'Producer Surplus'. Use a diagram in your answer.

c)The government now makes a law which states that the maximum price cheese can be sold for is 5 per kilogram. How does this new law affect total surplus in the market? Use a diagram in your answer.