1. The demand and supply functions for sweatshirts (the basic grey kind) are as follows:
Demand Supply
Quantity Quantity
Demanded Supplied
Price (per period) Price (per period)
$10 15,000 $10 22,000
9 15,500 9 19,000
8 16,000 8 16,000
7 16,500 7 13,000
6 17,000 6 10,000
5 17,500 5 7,000
4 18,000 4 4,000
3 18,500 3 1,000
2 19,000 2 0
The equations for the demand and supply functions above are as follows:
Qd = 20,000 - 500P
Qs = -8,000 + 3000P
a. Solve for the equilibrium price and quantity. (Hint: at equilibrium, quantity supplied equals quantity demanded.)
b. Assume the supply function changes to:
Qs = -5,000 + 3000P
Does supply increase or decrease? What is the new equilibrium price and quantity?
2. Calculate the arc price elasticity of demand for wheat in the two situations below:
The Wheat Market Farmer Brown's Wheat
Old price; $3.40/bu Old price; $3.40/bu
Old quantity; 2.5 billion bu Old quantity; 28,000 bu
New price; $3.20/bu New price; $3.20/bu
New quantity; 2.525 billion bu New quantity; 35,000 bu
Why are both elasticities different?
3. Explain the effect on supply and demand that the credit market crisis in the United States in 2008 had in the market for existing single-family homes. Assuming the demand for existing single-family homes is relatively inelastic, what is likely to happen to the total revenues of home sellers as a result of the credit market crisis?
4. For each of the following changes, show the effect on the demand curve and state what will happen to market equilibrium price and quantity in the short run.
a. Consumers expect that the price of the good will be higher in the future.
b. The price of a substitute good rises.
c. Consumer incomes fall, and the good is normal.
d. Consumer incomes fall, and the good is inferior.
e. A medical report is published showing that this good is hazardous to your health.
f. The price of the good rises.
5. Demand and supply in the wheat market are given by:
QD = 2000 - 1000 P and QS = -500 + 1000 P
where Q is millions of bushels and P is price per bushel.
a. Find the equilibrium price and quantity.
b. Suppose that the government wishes to support farm income and thus sets a price floor of $1.50/bushel. Find the size of the farm surplus.
c. What is the cost of this program to the government?