Supply and Demand and New Equilibrium Price

Satisfactory Essays
Answers to End-of-Chapter Questions in Chapter 3

1. Assume that the (weekly) market demand and supply of tomatoes are given by the following figures:

|Price (£ per kilo) |4.00 |3.50 |3.00 |2.50 |2.00 |1.50 |1.00 |
|Qd (000 kilos) |30 |35 |40 |45 |50 |55 |60 |
|Qs (000 kilos) |80 |68 |62 |55 |50 |45 |38 |

(a) What are the equilibrium price and quantity? (b) What will be the effect of the government fixing a minimum price of (i) £3.00 per kilo; (ii) £1.50 per kilo? (c) Suppose that the government paid tomato producers a subsidy of £1.00 per kilo. (i) Give the new supply schedule. (ii) What will be the new equilibrium price? (iii) How much will this cost the government? (d) Alternatively, suppose that the government guaranteed tomato producers a price of £2.50 per kilo. (i) How many tomatoes would it have to buy in order to ensure that all the tomatoes produced were sold? (ii) How much would this cost the government? (e) Alternatively suppose it bought all the tomatoes produced at £2.50. (i) At what single price would it have to sell them in order to dispose of the lot? (ii) What would be the net cost of this course of action?

(a) Equilibrium is where quantity demanded equals quantity supplied: where P = £2.00 per kilo; Q = 50 000 kilos

(b) (i) There will be a surplus of 22 000 kilos (i.e. 62 000 – 40 000) (ii) No effect. The equilibrium price of £2.00 is above the minimum.

(c) (i) With the £1.00 subsidy, producers will supply at each price the amount that they were previously willing to supply for £1 more. The schedules will now be as follows:

|Price (£ per kilo) |4.00 |3.50 |3.00 |2.50 |2.00 |1.50 |1.00 |
|Qd (000 kilos) |30 |35 |40 |45 |50 |55

You May Also Find These Documents Helpful

• Good Essays

Remember the difference in a change in demand [supply] and a change in quantity demanded [supplied]. Don't shift both curves unless appropriate). Describe what happens to equilibrium price and sales. Explain why or why not this makes sense in the real world. -A- Show the effect on the U.S. new construction residential housing market in the event of a severe economic recession. In theory, during a recession both demand for, and the supply of homes would drop. Demand would drop due to unemployment and…

• 373 Words
• 2 Pages
Good Essays
• Good Essays

sets postal prices through legislation, market forces do not determine stamp prices. c. New York City government auctions taxi medallions that give the right to transport passengers by taxi. Because the government controls the number of medallions, market forces do not determine their price. 3. Indicate whether each of the following statements describes an increase in demand, decrease in demand, change in quantity demanded, increase in supply, decrease in…

• 721 Words
• 3 Pages
Good Essays
• Satisfactory Essays

1. Suppose that the international market for beef is in equilibrium. Describe in a written sentence how the following change to a determinant of supply and/or demand will affect the equilibrium price and quantity. Illustrate each answer with a supply-and-demand diagram depicting the shift(s) and the resulting effect on price and quantity a. Outbreak of mad cow disease kills off much of the cattle stock. b. The price of chicken, a substitute, declines sharply. c.…

• 699 Words
• 3 Pages
Satisfactory Essays
• Powerful Essays

Answer Key Part I: True/False and Multiple Choice 1. In equilibrium in the strawberry market, strawberries sell for \$1.50 a quart. If the government institutes a price floor of \$1 per quart of strawberries, the result will be a surplus of strawberries. a. The preceding statement is TRUE. b. The preceding statement is FALSE. 2. A price ceiling will lead to deadweight loss as a result of overproduction of the good at the higher ceiling price. a. The preceding statement is TRUE. b. The preceding…

• 1655 Words
• 7 Pages
Powerful Essays
• Better Essays

marketplace fluctuations in the supply and demand affect the price of the gasoline and everyone can see the result of that volatility at the pump as the gas price fluctuates accordingly. When demand for the gas is high retailers raise prices and when demand is low – the prices are driven down. As an example, one can observe that when in need for gas the intersection that has several gas stations would have the same or similar pricing for gas because the supply is high and the prices are contained by competition…

• 1117 Words
• 5 Pages
Better Essays
• Good Essays

Case in the news: Demand/Supply and Equilibrium This article is based on the fundamental idea of supply and demand of the iPhone 5 whose demand has outstripped its supply. Due to the fact that the demand is so high, even those who pre-ordered the new slim iPhone 5 had to wait until October to get this new phone. The sales have broken all previous records and stand tall at 2 million phones in the first 24 hours. According to the article people had been…

• 615 Words
• 3 Pages
Good Essays
• Satisfactory Essays

Part 1: Suppose that the tin mining market is perfectly competitive. The market demand curve is given by D(P) = 300 – P, where D is measured in units per year, and P is measured in \$ per units. There are many potential entrants into this market, all of whom have identical cost curves. These cost curves are summarized in Table 1 below: Table 1 Cost Curve Formula Maginal cost (in \$ per unit) MC = 30. Fixed cost per year FC = 100. (Annualized) Capital charge CC = 100. Capacity (in units per year)…

• 1532 Words
• 6 Pages
Satisfactory Essays
• Powerful Essays

different b) will want to trade if they are on the contract curve c) will not want to trade if their consumption bundles are not Pareto-efficient d) will only want to trade if they are not at their endowment e) may want to trade if the price ratio is not equal to one answer a If MRSA is not equal to MRSB, the two consumers will be able to arrange a mutually beneficial trade. Mutually beneficial trade will not occur only when the allocation of resources among A and B is already efficient…

• 2894 Words
• 12 Pages
Powerful Essays
• Better Essays

society c. exists in unlimited quantities d. must be produced by a firm 2. Michigan has an abundant supply of fresh water. However, an economist would consider it a scarce resource because a. water is necessary for humans ' physical survival b. pollution will eventually destroy all life in the Great Lakes c. water is limited relative to people 's unlimited wants d. water commands a very high price 3. The difference between a good and a service is a. that goods help satisfy unlimited wants;…

• 1988 Words
• 8 Pages
Better Essays
• Satisfactory Essays

take to answer 36 60 minutes 24 36 minutes 30 50 minutes 10 15 minutes Weightage by content Unit No 1 2 3 4 6 7 8 9 10 3. 6 6 10 10 Mark Unit Sub-Units Introduction Consumer Equilibrium and Demand Producer Behaviour and Supply Forms of Market and Price determination National income and related aggregates Money and Banking Determination of Income and employment Government Budget and the economy Balance of Payment Total Marks 4 18 18 10 15 8 12…

• 6104 Words
• 25 Pages
Satisfactory Essays