Question

1. Rank the following markets from that where price controls would cause the greatest disequilibrium between supply and demand down to those where controls would cause the smallest disequilibrium.

A. 4

B. 1

C. 3

D. 2

- Rice in a poor country (elasticity of demand low; elasticity of supply low)

- Airline travel in a rich country (elasticity of demand high; elasticity of supply high)

- Veterinary services (elasticity of demand medium, elasticity of supply low)

- Fashion (elasticity of demand high, elasticity of supply medium)

2. Rank these in terms of the price change with a sudden supply shortage.

A. 2

B. 1

C. 3

D. 4

- Rice in a poor country (elasticity of demand low; elasticity of supply low)

- Airline travel in a rich country (elasticity of demand high; elasticity of supply high)

- Veterinary services (elasticity of demand medium, elasticity of supply low)

- Fashion (elasticity of demand high, elasticity of supply medium)

Answer 1

Answer:

1. Same level of price control would affect the equilibrium between demand and supply curves differently depending on their respective elasticities. A highly elastic demand curve would move away quickly from the supply curve and vice versa. But movement is reluctant in case of inelastic curves. Thus, disequilibrium is much quicker in case of more elastic curves. Using this logic, the following order is true:

A -- 2 -- Airline travel in a rich country (elasticity of demand high; elasticity of supply high

B -- 4 -- Fashion (elasticity of demand high, elasticity of supply medium)

C -- 3 -- Veterinary services (elasticity of demand medium, elasticity of supply low)

D -- 1 -- Rice in a poor country (elasticity of demand low; elasticity of supply low)

2. Sudden shortage in supply would change price in different ways depending on the elasticity of the supply curve. If supply curve is inelastic, shortage would cause price change to a greater extent than that caused by an elastic curve to the same degree of supply change. So, arranging the following price changes -greatest change to least change:

A -- 1 -- Rice in a poor country (elasticity of demand low; elasticity of supply low)
B -- 3 -- Veterinary services (elasticity of demand medium, elasticity of supply low)
C -- 4 -- Fashion (elasticity of demand high, elasticity of supply medium)
D -- 2 -- Airline travel in a rich country (elasticity of demand high; elasticity of supply high