Question

NAME Due Wednesday, March 4 Each question is worth 5 points. To get all points you must properly label your diagrams and identify original and new equilibrium. California Wingin

Answer 1

a. Market for natural gas. The government usually fixes a price ceiling below the equilibrium market price. At a lower price below the equilibrium price there will be a shortage in the market for natural gas and its equilibrium quantity will be low. But the removal of price ceiling increase the equilibrium price of natural gas along with its equilibrium quantity, Price PE----- ------- Price ceiling Q2 Q Q1 Quantity Before the removal of price ceiling on natural gas, the equilibrium price was Pl and the quantity traded was Q2. There is a shortage equal to Q2 Q1. This excess demand exerts the upward pressure on price. But the price cannot move above Pl. But after the removal of price ceiling the excess demand push up the price to P. While the price increases, the quantity supplied increase to Q and the equilibrium quantity increase from Q2 to Q. The equilibrium moves from E to El. b. Market for heating oil. Ileating oil is a substitute for natural gas. Between two substituted products, the demand for its substituted products increase when the price of one increase. The increase in price of natural gas after the removal of price ceiling increases the demand for heating oil. Its demand curve shift to the right leading to a rise in cquilibrium price and equilibrium quantity. Pricel PT- Q Q1 Quantity After the price ceiling the price of natural gas increase. The consumers substitute heating oil in place of natural gas. This will increase the demand for heating oil. It's demand curve shill to the right to D1. This increased demand rise its price to Pl and

the quantity traded to Q1. In short its equilibrium quantity increase to Q1 and equilibrium price increase to Pl. The equilibrium of the market moves from E to El c. Market for electric ſurnace. With an increase in price of natural gas people began to use electric furnace in place of natural gas furnace. This will create more demand for electric furnace in the market. The demand curve of electric furnace shift to the right. This will cause the quantity and price of electric furnace to increase. Price Pt---- 2 D1 Q Q1 Quantity The demand curve shift to the right from D to D1. The increased demand increases the price to P1 and the equilibrium quantity increase to Q1. The market moves from the initial equilibrium E to new equilibrium El. d. Market for natural gas oven. The natural gas and natural gas oven are complementary goods. They are used together. In case of complementary goods, an increase in the price of one not only reduces its own demand but also reduce the demand for its complements. Less use of natural gas creates less demand for natural gas oven. The demand curve of natural gas oven shift to the left leading to a fall in its equilibrium price and quantity. Price P: ----- NET I DID 010 Quantity The demand curve of natural gas furnace shift to the left from D to D1. The fall in demand reduce the price to P1. The equilibrium quantity decrease to Q1. Both equilibrium price and quantity decrease. The fall in price and quantity moves the equilibrium from E to El.