Question

Suppose in Diamond Land people mine diamonds, and you have a demand and supply curve for diamonds, where P is the price of diamonds and Q is the quantity demanded for diamonds (in pounds):

P=300-0.5Q

P=100+0.5Q

Please find the equilibrium price and quantity for diamonds. Please graph supply and demand curves and show the equilibrium price and quantity demanded on the graph. Please also label the axes, intercepts, and curves.

Suppose the government of Diamond Land wants to implement price control and decides to fix the price at P=250. Is this a price ceiling or price floor? On the graph in question 1 above, please show how the new graph will impact quantity supplied and quantity demanded. Please calculate this quantity supplied and quantity demanded. Is this a shortage or a surplus? How much?

Consider market for diamonds. Suppose the market is at equilibrium as in question 1 above. Miners invented new technology that allows to extract large diamonds more efficiently/faster. How will this event impact price and quantity? Briefly explain. Draw a diagram that illustrates this effect (hint: what will be effected: supply or demand? In what way?). On the graph, you can depict original supply and demand and equilibrium (from question 1), carefully labeling the axes, intercepts, and curves.

Answer 1

Given the demand and the supply, equilibrium.is attained at a point where demand = supply.

Thus, 300-0.5Q = 100+0.5Q

which gives P = 200 and Q = 200.

If the government plans to implement price control of $250 on diamonds, this is an exmaple of price floor. This is because the consumers are now forced to buy diamonds at a higher price above the equilibrium level.

The new price floor line at P= 250 is a parallel straight line paralle to the x-axis.

The new demand is: Qd = 100 and new quantity supplied : Qs = 300.

Thus, there is a surplus in the economy equal to 200 units of diamonds.

As a result of a new technology that allows to extract diamonds more efficiently, the supply curve will shift to the right, resulting in a fall in equilibrium price and rise in equilibrium quantity.