Question

1. Explain the impact of following on equilibrium price and quantity

a. Corona Virus spreading in China has reduced the demand for travel. Evaluate the impact on Gasoline.

b. In response, OPEC has decided to cut production. Evaluate the new impact on Gasoline.

c. Price of fertilizer on corn increases. Evaluate the impact on corn.

d. Teens have discovered an exciting new app on smart phones. Evaluate the impact on smartphones.

2.

a. Estimate the consumer surplus and produces surplus in the following case.

Price Quantity Demanded Quantity Supplied

0	15	0
1	13	3
2	11	6
3	9	9
4	7	12
5	5	15
6	3	18
7	1	21
7.5	0	22.5

b. Estimate the change in consumer surplus, produces surplus and the deadweight loss in the following cases.

i. Price floor at P=5

ii. Price ceiling at P=2

3. Show the changes in equilibrium price, quantity, consumer surplus, produces surplus and deadweight loss as a result of the following.

a. Increase in tax on Cigarettes.

b. Increase in payroll tax imposed on employers.

Answer 1

1.

A

Reduction in demand for the travel, will cause demand for the gasoline to decrease and demand curve of gasoline will shift to the left. As a result, price of gasoline and quantity of gasoline will decrease at the new equilibrium.

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B.

In response, if OPEC decides to cut the production of gasoline, then supply curve of gasoline shifts to the left and supply of gasoline decreases also. It causes quantity of gasoline to decrease for sure at the new equilibrium.

But, change in price depends upon the degree of shift in demand and supply. If decrease in supply is more than the demand, then price increases at the new equilibrium. If decrease in demand is more than the supply, then price decreases at the new equilibrium.

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C.

With increase in the price fertilizers, the cost of operations increases. It causes supply to decrease and supply curve to shift to the left. As a result, price of corn increases and quantity of corn decreases at the new equilibrium.

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D.

It will make teens to demand more of the smartphones so that they can use the exiting app. It makes demand for the smartphones to increase and demand curve of smartphones shifts to the right. As a result, price and quantity of smartphones both increase at the new equilibrium.

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