Question

Assume that the market for scones is in equilibrium.

1. Graph the market for scones, assuming unit-elastic supply and demand. Label the equilibrium price Pe and the equilibrium quantity Qe.
2. Average consumer income goes from $25,000 to $30,000 as the quantity demanded increases from 50,000 units to 60,000 units. What is the income elasticity for scones across this range?
3. Are scones a normal or inferior good? Explain using the income elasticity coefficient.
4. Illustrate the effect of part (b) on your graph from part (a), labeling the new equilibrium price and quantity Pe2 and Qe2, respectively.
5. What happened to the producer surplus as a result of part (d)?
6. On a new graph, illustrate the effect of an effective price floor on the market for coffee cakes. Label the price floor Pf and the quantity exchanged Qf.
7. Shade the deadweight loss from the price floor.
8. The price floor is $3, the quantity consumed with the price floor intersects the supply curve at $2, and there was a loss of 20,000 units from pre-floor equilibrium. Calculate the deadweight loss.

Answer 1