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# ps6an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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Economics 101 – Fall 2005 Wei Zhang Problem Set 6 – ANSWER KEY The Impact of a Price Ceiling 1) Recall that the demand for leaf blowers in Madison is given by the equation Q D =90-P, while supply is given by Q S =2P. a. In equilibrium we know that the quantity demanded must equal the quantity supplied. Thus, Q D = 90-P = 2P = Q S 90 = 3P P* = 30 and Q* = 90 – (30) = 60 –or- Q* = 2(30) = 60 b. The city of Madison, in order to encourage a citywide cleanup, imposes a price ceiling of \$10/blower. There will be a shortage of 60 leaf blowers. It is easiest to show this using a graph. Begin by rewriting the demand and supply equations in slope-intercept (y=mx+b) form: Demand: P = 90-Q D Supply: P = ½ Q S , Now graph these two equations: Introducing the price ceiling of \$10 can be done graphically as follows. To find the quantity demanded and the quantity supplied at the price of \$10, just substitute P= \$10 into the demand and supply equations, to find 80 and 20, respectively. The shortage is the difference between demand an supply, and therefore 80-20 = 60. Page 1 of

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ps6an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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