Question

 Use the market schedule below to answer the questions that follow:

P(¢) 5 9 13 17 21 25

       Qs 200 800 1400 Qd 2000 1700 1400

P = price, Qd = quantity demanded (in bags),

2000 2600 3200 1100 800 500

Qs = quantity supplied (in bags)

       a) Determine the equilibrium price and quantity.

b) If price is fixed at ¢21, calculate the excess demand/supply. c) If price falls from ¢13 to ¢9, calculate the:

i. price elasticity of demand. ii. arc price-elasticity of demand.

Answer 1

(a) Equilibrium price and quantity are found where quantity supplied equals quantity demanded at the same price. From the table equilibrium price =13 and quantity = 1400bags.

(b) excess supply will be

$2600-1400=600$

Demand will reduce by

$800-1400=300$

(C) $e_{(d)}=\frac{dQ/Q}{dP/P}$

$=(1700-1400)/1400$

$=0.21$

$21$ %

$=(9-13)/13=-0.31$

$31$ %

$=21/31=-0.697$

(I) $Arc Ed = [(Qd2 – Qd1) / midpoint Qd] ÷ [(P2 – P1) / midpoint P]$

Qd midpoint$=(1400+1700)/2=1550$

P midpoint$=(13+9)/2=11$

$=(1700-1400)1550=0.194$

$19.4$ %

$=(9-13)/11=-0.364$

$36.4$ %

$=19.4/3.64=-0.53$