Suppose that the market for gasoline can be represented by the following equations

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ANSWER ALL QUESTIONS

Principles of Microeconomics Assignment II

Question 1: Suppose that the market for gasoline can be represented by the following equations: Demand: P = 10 – 2QD

Supply: P = 1 + 0.5QS

Where P is the price per gallon, and Q represents quantity of gasoline, represented in millions of gallons of gasoline consumed per year.

a) Calculate the equilibrium price and quantity of gasoline.

b) Concerned over high prices, the government sets a price ceiling of $2.25 per gallon of gasoline. What is the new quantity of gasoline sold in the marketplace? Use a supply and demand diagram to illustrate your answer, showing both the original equilibrium from part (a) and the new quantity sold with the price ceiling.

c) Calculate the consumer surplus and producer surplus at the initial equilibrium price and quantity from part (a)

Question 2: You are the manager of a store that carries generic soft drinks. Due to a local economic boom, your customers’ incomes are forecasted to rise by five percent during the next month. The income elasticity of demand for these products is estimated to be –2.0. Estimate the change in the quantity of your soft drink orders required to accommodate the new demand without a surplus or shortage of inventory (that is, how much will demand for the generic soft drinks change due to the increased income?).

Question 3: Suppose that demand and supply of apples are described by the following equations: P = 100 - 3Q (demand)

P = 20 + Q (supply)

a) Calculate the equilibrium price and quantity. Illustrate.

b) Suppose a $4 tax is placed on apples.

i. What is the new equilibrium quantity?

ii. How much do consumers pay to get this quantity?

iii. How much do suppliers receive for selling this quantity?

iv. Show your results on a supply & demand diagram.

 

 

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