ECONOMICS 1001 – Market Forces: Demand and Supply

Week 3 Chapter 2: Market Forces: Demand and Supply
For
this week read Chapter 2, pages 48-68
Answer
the following questions:
Question 2. On page 69
Good X is produced in a competitive market using input A.
Explain what would happen to the supply of good X in each of the following
situations.
a.
The price of input A
decreases.
Hint:
1. Draw the demand and
supply curves. Label each curve and identify the initial points (D0,
So , E0 , P0
and Q0 ).
2. Now, show which curve
(demand or supply) will be affected if the input cost of A decreases and why?
Is it the demand or the supply and label accordingly (D1, or S1
).
3. What is the new
equilibrium? Label as P1, Q1 and E1

4.
Give an interpretation as to the new price
(higher or lower) and the new equilibrium quantity (higher or lower).Review the topic on
Comparativestatistics.

b.
An excise tax of $3 is
imposed on good X.
Hint: Here, again begin your
analysis from the initial values of equilibrium as given under comparative
statics.

c.
An ad valorem tax of 7
percent is imposed on good X.
Hint: Use comparative statics
and show how the supply curve will be affected under this situation.

d.
A technological change
reduces the cost of producing additional units of good X.
Hint: Use theapproach given under
part (a)of this question.
Question 7. On page 70
Suppose demand and supply are given by Qd = 14 –1/2P and Qs =
1/4P – 1.
a.
What are the
equilibrium quantity and price in this market? Show your work?
Hint:
1.
Draw the demand and
supply graph and label all initial points ( D0, S0, P0,
E0), following the use of comparative statics given your text on
pages 62-65)
2.
Set demand equal to
Supply and solve the values. See page 62 for a practice problem
3.
Next, insert the
values in the graph.
Question 8. On page 70
Use
the accompanying graph on page 71 to answer these questions.

Bottom of Form

a.
Suppose demand is D
and Supply is S0. If a price ceiling of $6 is imposed, what are
the resulting shortage and full economic price?
b.
Suppose demand is D
and supply is S0. If a price floor of $12 is imposed, what is the
resulting surplus? What is the cost to the government of purchasing any and
unsold units?
c) Suppose demand is D
and supply is S0so that the equilibrium price is $10. If an excise
tax of $6 is imposed on this product, what happens to the equilibrium price
paid by consumers? The price received by producers? The number of units sold.
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