UC Merced MGMT 100 – Suppose that in the market for aluminum

| March 14, 2016

Suppose that in the market for aluminum rods the demand and supply functions are given by:

Demand Function: QD = 300 – 2.5PSupply Function: QS = 5P – 15

Where P = price per aluminum rod and Q = number of aluminum rods

(a) Find the initial equilibrium price and quantity. Calculate the initial consumer surplus (CS) and producer surplus (PS).

(b) Suppose the government imposes a price floor on aluminum rods. Aluminum rods must now sell for$50 per unit. Will there be a surplus or a shortage of aluminum rods at the price floor? Calculate theamount of the surplus or shortage.

(c) Calculate the consumer surplus (CS) and producer surplus (PS) after the imposition of the price floor.Calculate the deadweight loss associated with the imposition of the price floor.

(d) Are households better off or worse off after the imposition of the price floor? Are firms better off orworse off after the imposition of the price floor? Use your answers from Parts (a) and (c) to explain youranswer.

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