The market demand and supply curves of a good are qD = 600 – 3p and qS = 100 + 2p (p in rupees). The government fixes a price ceiling Rs 20 below the equilibrium price. The excess demand at the ceiling is:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 100 units
Given:
qD = 600 − 3p
qS = 100 + 2p
Price ceiling = equilibrium price − Rs 20
First find the equilibrium price, where market demand equals market supply.
\( 600 - 3p = 100 + 2p \)
\( 500 = 5p \)
\( p^* = 100 \)
Price ceiling = 100 − 20 = Rs 80
Excess demand at the ceiling is quantity demanded minus quantity supplied.
\( q^D = 600 - 3(80) = 360 \)
\( q^S = 100 + 2(80) = 260 \)
\( ED = 360 - 260 = 100 \)
The excess demand is 100 units.
Option (2) 40 units — this is only the fall in supply from the old quantity of 300, a part of the gap.
Option (4) 60 units — this is only the rise in demand from the old quantity of 300, a part of the gap.
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