Due to bushfire, mango farmers who operate in the perfectly competitive market are facing potential enormous economic loss. The government decides to put in price floors to help mango farmers. The demand function for Mango is given by: P = 30–0.5Q. The supply function is given by: P = 15 + 0.25Q. Which of the following price floors will be binding? Group of answer choicesP = 25P = 27P = 28P = 29All of the other answers are correct.
Question
Due to bushfire, mango farmers who operate in the perfectly competitive market are facing potential enormous economic loss. The government decides to put in price floors to help mango farmers. The demand function for Mango is given by: P = 30–0.5Q. The supply function is given by: P = 15 + 0.25Q. Which of the following price floors will be binding? Group of answer choicesP = 25P = 27P = 28P = 29All of the other answers are correct.
Solution
A price floor is binding if it is set above the equilibrium price. The equilibrium price is where the demand and supply curves intersect.
First, we need to find the equilibrium price by setting the demand function equal to the supply function:
30 - 0.5Q = 15 + 0.25Q
Solving for Q gives us Q = 20. Substituting Q = 20 into either the demand or supply function will give us the equilibrium price. Let's use the demand function:
P = 30 - 0.5(20) = 20
So, the equilibrium price is 20.
A price floor will be binding if it is set above this equilibrium price. Therefore, all the given price floors (P = 25, P = 27, P = 28, P = 29) are binding because they are all above the equilibrium price of 20.
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