Suppose that a local government has imposed a quota of 0.5 million gallons on water usage. Before the quota is enforced, the market demand curve is given by
Q^D = 10 - 2.25P
And the market supply curve is given by
Q^S = -10 + 2.75P
Where the quantity is measured in millions of gallons per month and the price is in dollars per thousand gallons. After the quota is imposed, the price becomes ____.

Question

Quizplus · Accepted Answer

The quota creates a shortage, so the price will rise to the point where the quantity demanded equals the quota. At this point, the quantity demanded is 0.5 million gallons, so we can solve for the price by plugging this value into the demand curve:0.5 = 10 - 2.25P2.25P = 9.5P = $4.22

Suppose That a Local Government Has Imposed a Quota of 0.5