Quiz 2-

Assume that all demand and supply curves are linear. Use the following information for the next SIX questions.

Suppose you have the following information about a demand curve.

1. What is the equation for the demand curve?

Suppose that you also know that the supply curve is P = 4 + .2Q

2. What is the equilibrium price and quantity?

3. Determine consumer surplus for this market.

4. Determine producer surplus for this market.

5. Suppose that the government introduced a price floor in this market, and set it at $5.00.  Determine the impact of this price floor on this market: be specific about whether the price floor creates a shortage or a surplus and provide a numeric measure with your answer.

6. Suppose that the government introduced a price ceiling in this market, and set it at $5.00.  Determine the impact of this price ceiling on this market: be specific about whether the price ceiling creates a shortage or a surplus and provide a numeric measure with your answer.

7. The iPhone and the Blackberry are substitute goods in the smart phone market.  What happens to the demand for iPhones when the price of the Blackberry decreases?  Draw a graph of this scenario.  Clearly label your axes, and indicate which curves are shifting (if any).  Label the new equilibrium point.  Also be sure to describe any indeterminacy which may occur and would not be apparent on your graph.

8. (This question is worth 1/2 of a point) Chocolate syrup and ice cream are complementary goods.  Consider the effect of both of the following on the ice cream market.  First, the price of chocolate syrup increases.  Additionally, the food and drug administration endorses a new hormone which allows cows to produce more milk than before.  What happens in the ice cream market?  Draw a graph of this scenario.  Clearly label your axes, and indicate which curves are shifting (if any).  Label the new equilibrium point. Also be sure to describe any indeterminacy which may occur and would not be apparent on your graph.

9. Consider the shrimp market.  A friend of yours suggests that because of the recent oil spill, the supply of shrimp will decrease and the price will increase.  However, when you draw a supply curve for shrimp, you notice that higher quantities supplied are associated with higher prices, and that lower quantities supplied are associated with lower prices.  Is your friend right?  What is going on here?  A brief answer is all that is required.