MODULE 4- MARKET EQUILIBRIUM AND POLICY

There is a shortage in a market for a product when

the current price is lower than the equilibrium price.

If a price ceiling is set above the equilibrium price in a market

the quantity supplied will equal the quantity demanded

If the price floor is set above the equilibrium price in a market

the quantity supplied will exceed the quantity demanded

There is a surplus in a market for a product when

quantity demanded is less than quantity supplied

A tax on suppliers will cause the ___________ schedule to shift _____________.

supply, left

A tax on buyers will cause the ___________ schedule to shift ________________.

demand, left

Assume the government imposes a $0.75 excise tax on the sale of every 2 liter bottle of soda. The tax is to be paid by the producers of soda. The figure below shows the annual market for 2 liter bottles of soda before and after the tax is imposed. Market for Soda (Graph) D intersects S at (4, 1.5) D intersects S1 at (3, 2) a. Before the tax is imposed, the equilibrium price is $_____ per bottle and the equilibrium quantity is _____ billion bottles b. After the excise tax is imposed, consumers pay a price of $_____ per bottle c. After the excise tax is imposed, the price (or amount) producers keep after the tax is paid is $_____ per bottle d. After the tax is imposed, the equilibrium quantity is _____ billion bottles e. The government is able to collect $_______ billion of tax revenue from the tax.

a. 1.5, 4 b. 2 c. 1.25 (because 2-0.75=1.25) d. 3 e. 2.25 (because 0.75x3)

The monthly demand and supply schedules for new cars at a large California dealership are shown in the table below. Market for New Cars Price ($), Quantity of Cars Demanded, Quantity of Cars Supplied $40000, 100, 350 35000, 200, 325 30000, 300, 300 25000, 400, 275 20000, 500, 250 If the dealership is currently charging $40,000 for a new car, at the end of the month there will be: a. a shortage of 250 cars b. a surplus of 50 cars c. a surplus of 250 cars d. a shortage of 200 cars e. neither a surplus nor a shortage; the market will be in equilibrium

c. a surplus of 250 cars (because 350-100 is 250)

The monthly market for U.S. steel production (in millions of tons per month) is described in the table below. An increase in the price of iron ore, a critical input in the production of steel, shifts the supply curve to the left, decreasing supply by 1,800,000 tons at each price. (Hint: 1,800,000 tons = 1.8 million tons.) a. Fill in the new supply schedule in the table using the "New Quantity of Steel Supplied" column. Market for U.S. Steel Price ($), Initial Quantity of Steel Demanded, Initial Quantity of Steel Supplied, New Quantity of Steel Supplied $650, 2.5, 5.5, - 640, 3, 5.4, - 630, 3.5, 5.3, - 620, 4, 5.2, - 610, 4.5, 5.1, - 600, 5, 5, - 590, 5.5, 4.9, - 580, 6, 4.8, - 570, 6.5, 4.7, - 560, 7, 4.6, - b. What are the initial equilibrium price and quantity in the steel market? P= $_______ Q=________ c. What are the new equilibrium price and quantity in the market? P= $_______ Q=________

a. 3.7, 3.6, 3.5, 3.4, 3.3, 3.2, 3.1, 3, 2.9, 2.8 b. P= $600 Q= 5 c. P= $630 Q= 3.5

The U.S. Department of Agriculture guarantees dairy producers that they will receive at least $1.00 per pound for butter they supply to the market. Below is the current monthly demand and supply schedules for wholesale butter (in millions of pounds per month). Market for Wholesale Butter Price, Quantity Demanded, Quantity Supplied $0.80, 110, 66 0.90, 107, 74 1.00, 104, 82 1.10, 101, 90 1.20, 98, 98 1.30, 95, 106 1.40, 92, 114 1.50, 89, 122 1.60, 86, 130 1.70, 83, 138 1.80, 80, 146 a. What are the equilibrium price and quantity in the wholesale butter market? P= $_______ Q=________ million pounds b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program? Suppose that a decrease in the cost of feeding cows shifts the supply schedule to the right by 40 million pounds at every price. c. Fill in the new supply schedule given the change in the cost of feeding cows Market for Wholesale Butter Price, Quantity Demanded, Quantity Supplied $0.80, 110, 66, - 0.90, 107, 74, - 1.00, 104, 82, - 1.10, 101, 90, - 1.20, 98, 98, - 1.30, 95, 106, - 1.40, 92, 114, - 1.50, 89, 122, - 1.60, 86, 130, - 1.70, 83, 138, - 1.80, 80, 146, - d. Given the new supply of butter, what is the monthly surplus of butter created by the price support program?

a. P= $1.20 Q= 98 million pounds b. Zero c. 160, 114, 122, 130, 138, 146, 154, 162, 170, 178, 186 (add 40 to the initial supply) d. 18 (122-104)

The table below presents the annual market for sofas in Akron, Ohio. Suppose the state government imposes a $200 excise tax on every sofa sold to be paid by customers at the point of sale. Market for Sofas Price, Quantity Demanded, Quantity Supplied, Quantity Demanded with Excise Tax $1240, 200, 300, 100 1180, 230, 280, 130 1120, 260, 260, 160 1060, 290, 240, 190 1000, 320, 220, 220 940, 350, 200, 250 880, 380, 180, 280 820, 410, 160, 310 760, 440, 140, 340 700, 470, 120, 370 a. Before the excise tax is imposed, what are the equilibrium price and quantity of sofas in Akron? P= $_______ Q=________ sofas b. Including the excise tax, what is the new equilibrium quantity of sofas? c. After the excise tax is imposed, what is the new equilibrium quantity of sofas? d. What is the total amount of revenue collected by the government from the excise tax on sofas?

a. P= $1120 Q=260 b. $1200 (1000+200) c. 220 sofas d.$44,000 (200x220)

The market for bicycles in rural Indiana is described in the table below. Suppose that public spending improves bicycle lanes in rural areas. As a result, the demand for bicycles shifts to the right by 100 bicycles at every price. Market for Bicycles Price ($), Initial Quantity of Bikes Demanded, Quantity of Bikes Supplied, New Quantity of Bikes Demanded $200, 1000, 650, 1100 $225, 950, 700, 1050 $250, 900, 800, 1000 $275, 850, 850, 950 $300, 800, 900, 900 $325, 750, 950, 850 $350, 700, 1000, 800 Market for Bicycles (Graph) D and S intersect at (850, 275) D1 and S intersect at (900, 300) a. What are the initial equilibrium price and quantity in the bicycle market? P= $_______ Q=________ b. What are the new equilibrium price and quantity in the market? P= $_____ Q=______ c. Because of the increased number of bicycle lanes in rural Indiana, the equilibrium price of bicycles _____________ and the equilibrium quantity of bicycles __________.

a. P= $275 Q= 850 b. P= $300 Q= 900 c. increases by $25; increases by 50 bicycles

The market for packs of AA batteries during a typical week in Tulsa, Oklahoma is describes in the table below. Market for AA Batteries in a Typical Week Price ($), Quantity of Batteries Demanded, Quantity of Batteries Supplied $20, 0, 240 $18, 15, 215 16, 30, 190 14, 45, 165 12, 60, 140 10, 75, 115 8, 90, 90 6, 105, 65 a. During a typical week in Tulsa, Oklahoma, what are the equilibrium price and quantity in the market for AA batteries? P= $_______ Q=________ packs In weeks when tornados threaten Tulsa, Oklahoma, the demand for packs of AA batteries increases as shown in the table below. Market for AA Batteries with Tornado Threat Price ($), New Quantity of Batteries Demanded, New Quantity of Batteries Supplied $24, 0, 280 22, 15, 255 20, 30, 230 18, 45, 205 16, 60, 180 14, 75, 155 12, 90, 130 10, 105, 105 8, 120, 80 6, 135, 55 b. What are the equilibrium price and quantity of AA batteries in a week with a tornado threat? P= $_______ Q=________ packs c. This price ceiling of $8 per pack will ____________ the AA battery market during a typical week. d. What are the quantity demanded and quantity supplied with the price ceiling in effect during the weeks when tornadoes threaten Tulsa? Qd= _______ packs Qs=________ packs e. As a result of the price ceiling:

a. P= $8 Q= 90 packs b. P= $10 Q= 105 packs c. will not impact d. Qd= 120 packs Qs= 80 packs e. quantity demanded exceed quantity supplied by 40 packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma

The demand and supply schedules for sunscreen at a small beach are shown below. Market for Sunscreen Price, Quantity of Sunscreen Demanded, Quantity of Sunscreen Supplied $25, 1000, 2500 20, 2000, 2000 15, 3000, 1500 10, 4000, 1000 5, 5000, 500 0, 6000, 0 a If the price is $10 per bottle, how many bottles of sunscreen are demanded and supplied in equilibrium? Qd= Qs= In this case, there would be ________ pressure on the price b. What is the equilibrium price and quantity in the market for sunscreen? P= $________ Q=________

a. Qd= 4000 Qs= 1000 upward b. P= $20 Q= 2000

An infestation of banana spiders makes it extremely difficult to harvest Indian bananas. The U.S. Surgeon General has states that there are numerous health benefits from eating bananas. As a result, one should expect: a. the equilibrium price to rise, but the equilibrium quantity to be indeterminate from the information given b. the equilibrium price to be indeterminate from the information given, but the equilibrium quantity to rise c. the equilibrium price to be indeterminate from the information, but the equilibrium quantity to fall d. the equilibrium price to fall, but the equilibrium quantity to be indeterminate from the information given

a. the equilibrium price to rise, but the equilibrium quantity to be indeterminate from the information given