Suppose the market for a good is expressed as follows:
Inverse demand: P = 200 - 2Q
Inverse supply: P = 2Q
What is the equilibrium if the government imposes a supply quota of 75 units?
What is the equilibrium if the government imposes a supply quota of 25 units?
The market equilibrium with no quota is P = $100 and Q = 50 units. A supply quota of 75 units is not binding so the equilibrium is unchanged. A supply quota of 25 units will change the supply curve. The new supply curve will be the same as the no quota supply curve until 25 units and then it will be vertical. The new equilibrium is P = $150 and Q = 25 units.
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