Supply and Demand and New Equilibrium Price
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
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