Question

ONLY QUESTION 5 AND 6

1. The demand and supply schedules for pop in Vancouver are as follows:

Price ($/pack of 2 bottles) Quantity demanded (thousands /week)   Quantity supplied (thousands/ week)

2 280 0
3 240 30
4 200 60
5 160 90
6 120 120
7 80 140
8 40 160
9   0 180

(ONLY QUESTION 5 AND6)

1) With the use of a demand and supply diagram, show the market equilibrium.

b. Now suppose that a fire destroys one half of the pop producing factories. Supply decreases to one half shown in the above supply schedule. What is the new equilibrium price and quantity of pop? Show the new equilibrium in your diagram from part a).

c. Has there been a shift or a movement along the supply curve of pop in part b)?

d. As the pop factories destroyed by fire are rebuilt and gradually resume pop production, what will happen to the price of pop? The quantity of pop bought? The demand curve for pop?

2. Use your diagram from 1a) to calculate the producer and the consumer surplus at the original equilibrium.

3. Now suppose again that the demand and supply curves for pop are as shown in the above table. In an effort to reduce the consumption of pop, the government imposes a production quota of 80 thousand packs a week. With the use of a diagram, show the effect on the new equilibrium price and quantity bought.

4. Suppose that the demand and supply curves of pop are as shown in the above table. Now producers are crying out that they cannot make ends meet and ask the government for help. As a result, a price floor is imposed at $8 per pack of 2 bottles. What is the effect on the market price, quantity consumed, the shortage or surplus and revenues for producers?

5. in order to allow affordable access to all provincial parks, the government tries to set below market prices. This could be seen as an example of a price ceiling. Discuss the effect on the price, availability, fairness, winners and losers using a suitable diagram. Assume that the free market price of a campsite at Manning park in the summer would be $30 a night, and the government sets a price of $25 a night.

6. Analyze the following statement: Federal farm price supports can never achieve their goals because the above equilibrium price floors that are established by the Ministry of Agriculture invariably create surpluses, which in turn drive prices back down to their original equilibrium.v

Answer 1

5. At a price lower than the equilibrium level, the quantity demanded is more than the quantity supply. In this scenario, at $25 a night more people demand to use the campsite as compared to when the price is $30 a night. Hence, a surplus of demand is created. Under this certain price ceiling, the consumer gains as they get to enjoy the certain good at a smaller price and the government looses as they have to provide subsidized services to the consumers.

Peiting Qs SQD quantity p* = $30 Peeiling 2 $25

6. When the Ministry of Agriculture sets prices above the equilibrium, the farmers supply more quantity than they will supply at the equilibrium level. There is an excess supply. However, at the prices set by the Government, the demand for the quantity of the good is less than the equilibrium level. Hence, in order to increase demand to meet the excess supply, the price of the good starts to fall. This fall in prices reaches the equilibrium level where the quantity demanded is equal to quantity supplied.