Exercise Set 5
MARKET EQUILIBRIUM

I. Objectives

1. To compute the equilibrium price and quantity of a good
2. To analyze changes in the equilibrium price and quantity

II. Data

• The demand for coffee is given by P = a₁ - b₁Q, where P is the price of coffee and Q is the quantity of coffee demanded.
• The supply of coffee is given by P = a₂ + b₂Q, where P is the price of coffee and Q is the quantity of coffee supplied.
• Select values for the parameters a₁, b₁, a₂ and b₂. All four parameters must be positive. Why?
• Obtain the equilibrium price and quantity.
• Click on Gimme P and Q! to confirm.

III. Questions

1. Select suitable values for the parameters: a_{1 = ______}, b_{1 = _________}, a_{2 = _________,} b_{2 = _________}.
2. Sketch the demand and supply curves. Indicate the intercepts and the slope of each.

3. Compute the equilibrium price and quantity, and indicate them on the graph.

4. Reduce a₂ by 10%. This will cause which of the following?
   1. Demand will rise causing DD to shift to the right
   2. Demand will fall causing DD to shift to the right
   3. Supply will increase causing SS to shift to the right
   4. Supply will decrease causing SS to shift to the left
   5. None of the above

5. With the new value of a₂, obtain the revised eqbm values of price and quantity. Indicate the values on a graph.

6. Which of the following is consistent with the decrease in a₂?
   1. Consumers' incomes have fallen.
   2. The price of labor (an input) has fallen.
   3. The price of a complementary good has decreased causing consumers to demand more of both goods.
   4. The price of a substitute good has increased causing consumers to demand less of the good.
   5. None of the above

7. The stock market has risen considerably leading to an increase in consumers' wealth. All else remaining equal, this will cause which of the following? (Provide an explanation and a sketch.)
   1. a₁ will go up.
   2. a₁ will go down.
   3. b₁ will increase.
   4. b₂ will increase.
   5. None of the above

IV. Additional questions

1. The demand curve for peanuts may shift due to
   1. A decrease in the price of peanuts
   2. A decrease in the prices of inputs
   3. A change in the price of a substitute good
   4. A change in production technology
   5. Both b and d

2. Assuming that consumers treat beer and pretzels as complements, a decrease in the market price of beer will cause
   1. The price of pretzels to fall
   2. The demand curve for pretzels to shift to the left
   3. A decrease in the quantity of pretzels sold
   4. All of the above
   5. None of the above

3. Consider the market for a good. An increase in consumers' incomes causes
   1. A movement along and down the demand curve
   2. The demand curve to shift to the right
   3. The supply curve to shift to the right
   4. Both (a) and (c)

4. Consider the market for coal. If the wage rate paid to coal-miners increases,
   1. The supply of coal will increase
   2. The supply of coal will decrease
   3. The quantity of coal sold in the market will increase
   4. The quantity of coal bought by consumers will fall
   5. Both b and d

5. In a free market, a situation of excess demand for a good will be followed by
   1. A rise in price accompanied by an increase in quantity bought
   2. A rise in price accompanied by a decrease in quantity bought
   3. A fall in price accompanied by an increase in quantity sold
   4. A fall in price due to a shift in the demand curve
   5. A fall in price accompanied by a decrease in quantity sold

6. An increase in the price of shoes may be caused by
   1. An increase in consumers' incomes
   2. A decrease in the wage rate paid to shoe workers
   3. An improvement in technology in the shoe industry
   4. Either a or b
   5. All the above

7. The demand and supply curves for candles are given below:
   • Demand: P = 40 - 4Q
   • Supply: P = 10 + Q
     P is the price of a pound of candles (in $), Q the quantity of candles (in pounds).
   1. Sketch the demand and supply curves. Indicate the intercepts and slopes of each.
   2. Obtain the equilibrium price and quantity of candles sold in the market. Indicate them on a graph.
   3. There is a decrease in the price of wax (an input).
      • Indicate the effects on the eqbm price and quantity of candles. (Sketch required.)
      • Explain clearly why the price in b is no longer an eqbm price, and how the adjustment to the new eqbm takes place.

8. The demand and supply curves for books are:
   • Demand: P = 20 - 3Q
   • Supply: P = 4 + Q
     P is the price of a book in $, Q the quantity (number) of books.
   1. Sketch the demand and supply curves. Indicate the intercepts and slopes of each.
   2. Obtain the equilibrium price and quantity of books sold in the market. Indicate them on a graph.
   3. There is an increase in the price of paper (an input). Indicate the effects on the eqbm values of P and Q. (Sketch required.) Explain clearly why the price in is no longer an eqbm price, and how the adjustment to the new eqbm takes place.
   4. Sketch the effects of the imposition of a price ceiling in the book market. Is there an initial situation of excess demand or excess supply in the market?

9. Consider the supply and demand curves in the market for sweaters.
   • Supply: P = 2 + 2Q
   • Demand: P = 10 - 2Q
     P represents the price of a sweater; Q the quantity of sweaters.
   1. Sketch the demand and supply curves. Obtain the equilibrium values of price and quantity, and indicate them on the graph.
   2. Consider the market equilibrium in . If there is an increase in the price of wool, which is an input in sweater production, what happens to the equilibrium point? Brief explanation and a sketch required; no numbers are needed.
   3. You read in the newspapers that the price and sales (quantity sold) of sweaters have increased. Using the graph in , explain how that might have happened. A sketch is required, as well as a possible reason for the shift in the relevant curve. (No numbers needed.)

10. Consider the equation P = 200 - 50Q, where P represents the price of a pound of apples (in dollars) and Q the quantity demanded of apples (in pounds) by a consumer.
    1. Sketch the demand curve. Indicate the intercepts and the slope.
    2. An increase in the price of apples from $5 to $10 causes the demand curve to shift to the left. Is the statement true or false? Why?

11. The market for apples is described by the following equations:
    • Demand: P = 200 - 4Q
    • Supply: P = 50 + Q
      P is the price of a ton of apples ($/ton), Q the quantity of apples (tons).
    1. Obtain the equilibrium price and quantity of apples sold in the market. Indicate them on a graph.
    2. A major television network issues a report stating that a common pesticide used in apple production has been found to be harmful to health. Analyze the effect of the report on the apple market. [Using supply and demand curves, explain what will happen to the equilibrium price and quantity of apples.]
    3. You are given the following data on prices and consumption of apples in 1991 and 1992:

       Year	1991	1992
       Price per pound	$0.75	$1.20
       Annual consumption (pounds)	20,000	25,000

       Provide a plausible explanation for the change in prices and consumption of apples from 1991 to 1992. [Use supply and demand curves for the purpose.]

12. In recent years, prices of laptops have fallen while sales have increased. Using demand and supply of laptops, provide a possible reason for the phenomenon. (Provide sketch as well.)

	1c	2e	3b	4e	5a
	6a