Question

Short Answer For questions 43-x write your answers in the space provided. Be sure to read each question carefully as some have multiple parts. Question 43) On figure 1, label the supply and demand curves. Question 44) On figure 1, box in and label the area which corresponds to producer surplus. Box in and label the area which corresponds to consumer surplus. Figure 1 P P* Q* Page 10 Question 45) Suppose that figure 1 shows the supply and demand for powdered hot chocolate. Suppose that it is an extra cold day in Tempe, which causes a shift in the demand curve for hot chocolate powder. Also assume that the because of the cold weather, - new shipments of hot chocolate haven't reached local sellers due to icy conditions and so local sellers of hot chocolate are less willing to sell their remaining stock of hot chocolate powder. On figure 1, Draw any shifts in the supply or demand curves that result from this events. Question 46) On figure 1, shade in the new total surplus after the shocks discussed in the previous question. Question 47) You survey 1000 people about how many pounds of carrots they would buy a year at different carrot prices. Find the price elasticity of carrots between 4 dollars and 6 dollars. Price Average Pounds of Carrots per Person (dollars) 4 10 6 8 Page (dollars) Carrots per Person 10 4 6 8 Question 48) Explain in words how to interpret the price elasticity of demand you found in the previous question.

Answer 1

43, 44).

Consider the following fig.

$2 A2 S1 A1 E2 P2 E1 P1 D2 D1 A4 A3 q2 ql

So, here we have measured “P=price” on the vertical axis and “Q=quantity demanded” on the horizontal axis. Now, “D1” and “S1” are the demand and supply curve respectively. So, the equilibrium is “E1” the intersection of “D1” and “S1”, => the equilibrium price and the quantity demanded are “P1” and “q1”. So, here the “CS” and “PS” are given by, => “A1E1P1” and “P1E1A3” respectively.

45, 46).

Let’s assume that the demand for “hot chocolate powder” increases, => the demand curve will shift to “D2” from “D1”. Now, the cold weather the new shipments of the hot chocolate haven’t reached local seller, => the supply curve will shift to the left side, => the new supply curve is given by “S2”, => the new equilibrium is “E2” the intersection of “D2” and “S2”.

The new price and the quantity demanded are “P2” and “q2”, => the “CS” and “PS” are given by, => “A2P2E2” and “P2E2A4” respectively, => the TS is given by “A2E2A4”.