Macroeconomics Study Set 63

Business

Quiz 3 :

Demand, Supply, and Market Equilibrium

Quiz 3 :

Demand, Supply, and Market Equilibrium

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Why are shortages or surpluses more likely with preset prices, such as those on tickets, than flexible prices, such as those on gasoline?
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Preset prices are imaginary prices determined without considering the market demand for the product. The prices often do not match the market equilibrium and hence result in a shortage or surplus.
In the case of movie tickets, the prices are fixed estimating the demand. If the movie makes a positive review, it may result in a shortage. Conversely, if it makes a negative review, it results in surplus. However, in the case of gasoline, customers tend to search for alternative fuels and alternative modes of transport thus creating shortage and surplus.

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Demand and supply often shift in the retail market for gasoline. Here are two demand curves and two supply curves for gallons of gasoline in the month of May in a small town in Maine. Some of the data is missing. img a. Use the following facts to fill in the missing data in the table. If demand is D 1 and Supply is S1, the equilibrium quantity is 7000 gallons per month. When demand is D 2 and supply is S1, the equilibrium price is $3.00 per gallon. When demand is D 2 and supply is S1, there is an excess demand of 4000 gallons per month at a price of $1.00 per gallon. If demand is D 1 and supply is S2, the equilibrium quantity is 8000 gallons per month. b. Compare two equilibriums. In the first, demand is D 1 and supply is S1. In the second, demand is D 1 and supply is S2. By how much does the equilibrium quantity change? By how much does the equilibrium price change? c. If supply falls from S2 to S1 while demand declines from D 2 to D 1, does the equilibrium price rise or fall or stay the same? What if only supply falls? What if only demand falls? d. Suppose that supply is fixed at S1 and that demand starts at D 1. By how many gallons per month would demand have to increase at each price level such that the equilibrium price per gallon would be $3.00? $4.00?
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a. The table below shows the corresponding numbers.
Since demand and supply must equal at the equilibrium price, only the third row fulfills this requirement. When demand is D2 and Supply is S1, the equilibrium quantity is 8,000, and the corresponding price is given, $3.
img b. In the case of D1 and S1 the equilibrium is 7,000 at $2. In the case of D1 and S2, the equilibrium is 8,000 at $1. The quantity increases by 1,000 and the price decreases by $1.
c. In the case of D2 and S2 the original equilibrium is 8,500 at $2. In the case of D1 and S1, the equilibrium is 7,000 at $2. The quantity decreases by 1,500 and the price increases by $1.
In the case of D1 and S2, the equilibrium is 8,000 at $1. Compared to the case of D2 and S2, quantity decreases from 8,500 to 8,000 and price decreases from $2 to $1.
In the case of S1 and D2, the equilibrium is 8,000 at $3. Compared to the case of D2 and S2, quantity decreases from 8,500 to 8,000 and price increases from $2 to $3.
d. When supply is S1 and demand is D1, at price $3 the supply is 8,000. At equilibrium demand must also be 8,000. The original demand is 6,000. Thus demand has to increase by 2,000 for $3 and 8,000 to be equilibrium.
When supply is S1 and demand is D1, at price $4 the supply is 9,000. At equilibrium demand must also be 9,000. The original demand is 5,000. Thus demand has to increase by 4,000 for $3 and 8,000 to be equilibrium.

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ADVANCED ANALYSIS Assume that demand for a commodity is represented by the equation P = 10 -.2 Q d and supply by the equation P = 2 +.2 Q s, where Qd and Q s are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Q s = Q d, solve the equations to determine equilibrium price. Now determine equilibrium quantity.
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First we solve for the demand and supply in terms of price.
img img Next we equate demand and supply to solve for price.
img Lastly we substitute equilibrium price into demand or supply to solve for equilibrium quantity.
img

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Go to the Web site of the Energy Information Administration,http://www.eia.doe.gov , and follow the links to find the current retail price of gasoline. How does the current price of regular gasoline compare with the price a year ago? What must have happened to either supply, demand, or both to explain the observed price change?
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Suppose both the demand for olives and the supply of olives decline by equal amounts over some time period. Use graphical analysis to show the effect on equilibrium price and quantity.
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What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each.
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What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Smart car? a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops.
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Use the table below to answer the questions that follow: img
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Refer to the expanded table below from question 11. img a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to confirm your answers. b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q. c.How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price?
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Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves?
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Use two market diagrams to explain how an increase in state subsidies to public colleges might affect tuition and enrollments in both public and private colleges.
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What are the determinants of supply? What happens to the supply curve when any of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each.
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Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex for candy are given in the table below. img
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Assume the demand for lumber suddenly rises because of a rapid growth of demand for new housing. Assume no change in supply. Why does the equilibrium price of lumber rise? What would happen if the price did not rise under the demand and supply circumstances described?
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How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand to verify your answers.
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Suppose the supply of apples sharply increases because of perfect weather conditions throughout the growing season. Assuming no change in demand, explain the effect on the equilibrium price and quantity of apples. Explain why quantity demanded increases even though demand does not change
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The figure below shows the supply curve for tennis balls, S1, for Drop Volley tennis, a producer of tennis equipment. Use the figure and the table below to give your answers to the following questions. img a. Use the figure to fill in the quantity supplied on supply curve S1 for each price in the table below. img b. If production costs were to increase, the quantities supplied at each price would be as shown by the third column of the table (" S2 Quantity Supplied"). Use that data to draw supply curve S2 on the same graph as supply curve S1. c. In the fourth column of the table, enter the amount by which the quantity supplied at each price changes due to the increase in product costs. (Use positive numbers for increases and negative numbers for decreases.) d. Did the increase in production costs cause a "decrease in supply" or a "decrease in quantity supplied"?
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Most scalping laws make it illegal to sell-but not to buy-tickets at prices above those printed on the tickets. Assuming that is the case, use supply and demand analysis to explain why the equilibrium ticket price in an illegal secondary market tends to be higher than in a legal secondary market.
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The table below shows two demand schedules for a given style of men's shoes-that is, how many pairs per month will be demanded at various prices at a men's clothing store in Seattle called Stromnord. img Suppose that Stromnord has exactly 65 pairs of this style of shoe in inventory at the start of the month of July and will not receive any more pairs of this style until at least August first.
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Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers?
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