Question

The table below illustrates the demand and supply

schedules for seats on air flights between two cities:

What are the market price and equilibrium quantity in this market? Now suppose that federal

authorities limit the number of flights between the two cities to ensure that no more than 1,200 passengers can be flown. Evaluate the effects of this quota if price adjusts. (Hint: What price per

flight are the 1,200 passengers willing to pay?)

Short answer

$600

Step-by-step solution

Step1. Given information

The government imposes restrictions on the number of people that an airline can fly.

Step2. Explanation

Market equilibrium before the quota restriction is 1,600 passengers and $400 price as observed from the table, i.e., the point of intersection/ where demand equals supply.

Now, the government fixes a quota of 1,200 passengers only that an airline can fly. Hence, the quantity is fixed at 1,200. Which means they can't fly passengers more than 1,200 whatever the price they charge. Therefore, the price will adjust so that people are willing to pay more to be able to travel by air. This therefore increases the price to a level where the quantity demanded is 1,200. Hence, the price will adjust from $400 to $600.