Question

1. These are the supply and demand schedules for good X: Briefly discuss your responses.

                                                                 Quantity          Quantity

                                            Price             Supplied        Demanded

                                            $10                     18                   3

                                                9                     16                   4

                                                8                     14                   5

                                                7                     12                   6

                                                6                     10                   7

                                                5                       8                   8

                                                4                       6                   9

                                                3                       4                 10

                                                2                       2                 11

                                                1                       0                 12

           

           a)    What is the equilibrium price and quantity? At this equilibrium, what is the producer’s revenue?

            b)   If the government sets a price of $8 for X, what will be the price, quantity, and revenue? Will there be a shortage or surplus of X?

            c)   If the government sets a price of $3, answer the same questions as in b).

            d)   Suppose the demand for X increases, so that at each price, consumers want to buy three more units of the good. What happens to price, quantity, and revenue? Why has the quantity sold not increased by three units?

Answer 1

a) Equilibrium is where QD=QS

Price = 5

Quantity = 8

TR=P*Q = 8*5 =40

b) When the government sets the P=8

QS = 14, QD=5 So, there is a surplus of 14-5 = 9 units

P=8

Q=5 as only the amount of quantity demanded can be sold

TR=P*Q = 8*5 =40

c) When the price is set atP=3

QS=4, QD = 10 So, there is a shortage of 10-4 =6 units

P=3

Q=4 as only the amount of quantity supplied can be sold

TR = P*Q = 4*3=12

d) When demand increases by 3 per price, the new quantity demanded would be as follows:-

P	QS	QD
10	18	6
9	16	7
8	14	8
7	12	9
6	10	10
5	8	11
4	6	12
3	4	13
2	2	14
1	0	15

New equilibrium price = 6

New equilibrium quantity = 10

TR = P*Q = 10*6 =60

QS has not increased by three units because if supply increases by 3 per price level,the equilibrium price will fall to $5 which will decrease producers revenue.