In the central part of the state of Euphoria there is a small city, Avicenna, which is the home of Euphoric State University. [“Avicenna” is a corruption of the Arabic Ibn Sina, the byname of the great eleventh-century Iranian Abu Ali al-Husayn ibn Abd Allah ibn Sina: academic administrator, Quran reciter, astronomer, chemist, geologist, psychologist, theologian, mathematician, physicist, physician, poet, and paleontologist.] We will look at the daily market for espresso-based drinks in Avicenna.
Suppose that the quantity of espresso drinks demanded and the quantity of espresso drinks supplied daily are given by the equations:
- Demand: Q = 20,000 - 2000P
- Supply: Q = max(-16000 + 8000P, 0)
where P is the price of an espresso-based drink in dollars:
- What is the market equilibrium price?
- What is the market equilibrium quantity?
- What is the producer surplus?
- What is the consumer surplus?
- Explain, intuitively, why the distribution of producer and consumer surplus is what it is.
- What would the distribution of consumer and producer surplus be if the supply equation were: P = 3.6?