Question

0 - ZOOM + L M L MARKET EQUILIBRIUM & POLICY IN-CLASS WORKSHEET 5 This question examines the market for energy drinks. You will use the quantity demanded and the quantity supplied at different prices to identify the equilibrium price and to examine what happens when the government imposes a price floor in the market for energy drinks. Below, you are provided with the quantity of energy drinks demanded and supplied. This data is obtained from points on the demand and supply curves in the market for energy drinks. Price (per bottle) $2.00 Quantity of Energy Drinks Demanded Ein bottles 115 Quantity of Energy Drinks Supplied (in bottles 2.50 100 3.00 85 3.50 4.00 Task 1: What is the equilibrium price of an energy drink? At this price, what is the quantity of energy drinks demanded, and what is the quantity supplied? Task 2: Suppose that the government wants to discourage energy drink consumption and imposes a price floor of $4.00 per bottle. Following this intervention in the market for energy drinks, what is the quantity of energy drinks demanded, and what is the quantity supplied? Task 3: Does the price floor create a shortage or a surplus of energy drinks? How much of one?

Answer 1

1. The equilibrium occurs in the market when the quantity demanded equals the quantity supplied. We see that quantity demanded = quantity supplied = 85 when price is $3. Thus, equilibirum quantity is 85 and the equilibrium price is $3.
2. If the government imposes a price floor of $4, it is above the equilibrium price of $3. Thus, the price floor is binding. At $4 price, quantity demanded = 55 and quantity supplied = 105.
3. As the quantity supplied is greater than the quantity demanded, there is a surplus of energy drinks. The amount of surplus = 105 – 55 = 50 energy drinks

The situation is depicted in the graph below.

DD 55 85 105