Question

Graphs NOT required! The demand and supply curves for potato chips are: Price Quantity demanded (cents per (millions of bags per bag) week) 180 30 160 140 120 100 20 40 Quantity supplied (millions of bags per week) 160 180 200 220 240 260 280 80 60 a What are the equilibrium price and quantity of chips? (2) b. Calculate the price elasticity of demand from 40 to 80 cents per bag (Show your work). Is demand elastic or inelastic over this! range? (4) c. If a price ceiling of 50 cents per bag was set on chips describe the situation in the market and explain how the market adjusts.

Answer 1

a) The Equilibrium price is the price at which the quantity demanded is equal to the quantity supplied. So the equilibrium quantity is 170 millions of bags per week. The equilibrium price is 25 cents per bag.

b) When the price is 40 cents, the demand is 140 million bags and when the price is 80 cents, the demand is 60 million bags.

Elasticity of demand =

Percentage change in quantity demanded/ Percentage change in price

= ((60-140)/140) / ((80-40)/40)

= -0.5714 / 1

= -0.5714.

As the absolute value of elasticity, which is 0.5714 is less than 1, the demand will be relatively inelastic.

c) The Equilibrium price is $25 and the price ceiling is given to be $50. So, accordingly there should be no affect on the market due to this price ceiling, because the market is currently operating at the equilibrium point, where the price is $25. So, the ceiling price of $50 is not binding and does not affect either the buyers nor the sellers, so the market does not need to adjust itself because the market has not distorted due to the imposition of the price ceiling.

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