The market demand and supply functions for a staple agricultural commodity in a local mark… — JAMB UTME

The market demand and supply functions for a staple agricultural commodity in a local market are given by $Q_d = 250 - 5P$ and $Q_s = 50 + 5P$ , where $P$ is the price in Naira (₦) per bag and $Q$ is the quantity in bags. If the government imposes a price floor of ₦25 per bag, what will be the resulting market outcome?

A market surplus of 50 bagsAnswer
B
A market shortage of 50 bags
C
An outward shift in market demand to 175 bags
D
A consumer surplus of 175 bags

Answer

The resulting market outcome is a market surplus of 50 bags.

Equilibrium price is

P_e = ₦20

. A price floor enforced at

P = ₦25

is legally binding because it is above equilibrium. Substituting

P = 25

into the demand and supply equations yields

Q_d = 125

bags and

Q_s = 175

bags. Excess supply (surplus) is

175 - 125 = 50

bags.

Step-by-Step Solution

Determine the equilibrium price to check if the price floor is binding

Setting

Q_d = Q_s \implies 250 - 5P = 50 + 5P \implies 10P = 200 \implies P_e = ₦20

. Since the price floor of ₦25 is above equilibrium (₦20), it is effective/binding.

A price floor must be set above the equilibrium price to have a binding market effect.

Calculate quantity demanded at the floor price of ₦25

Q_d = 250 - 5(25) = 250 - 125 = 125

bags.

Higher prices reduce the quantity demanded by buyers according to the law of demand.

Calculate quantity supplied at the floor price of ₦25

Q_s = 50 + 5(25) = 50 + 125 = 175

bags.

Higher prices incentivize producers to increase quantity supplied according to the law of supply.

Calculate the market surplus

\text{Surplus} = Q_s - Q_d = 175 - 125 = 50

bags.

Market surplus occurs when quantity supplied exceeds quantity demanded at the enforced price floor.

Key Concept

Price Floor and Excess Supply (Surplus)

Estimated Time:1m 30s

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