Question

• i. Find the equilibrium price and quantity in the market for steel whose supply and demand curves are given by P=4Q^S and P = 12 – 2Q^D respectively.
• ii. If the price charged on the market is $6, how does the market get back to equilibrium, ceterus parabus.
• iii. Wages go up significantly so that the cost of production increases. Which of the following would be true in the short run:
  1. The demand curve would shift out or to the right and the equilibrium price would go up
  2. The demand curve would shift back or to the left and the equilibrium price would go down
  3. The supply curve would shift out or to the right and the equilibrium price would go down
  4. The supply curve would shift in or to the left and the equilibrium price would go up
• iv. Going back to the original supply and demand curves, suppose a sales tax is imposed on steel consumption. Which of the following would be true in the short run:
  1. The demand curve would shift out or to the right and the equilibrium price would go up
  2. The demand curve would shift back or to the left and the equilibrium price would go down
  3. The supply curve would shift out or to the right and the equilibrium price would go down
  4. The supply curve would shift in or to the left and the equilibrium price would go up

Answer 1

i) At equilibrium, demand = supply

Or, 12 - 2Qd = 4Qs

Or, 6Q = 12

Or, Q = 2

At Q = 2, from any of demand or supply equation we get, P = 8.

Therefore, equilibrium price is $8 and quantity is 2 units.

ii) If the charged price is $6, then it will be below equilibrium price. It will cause a shortage of steel because when price is below equilibrium, quantity demanded exceeds quantity supplied. In this situation, suppliers will increase the price because they know demand is high, so even if they increase price, Consumers will buy steel. Therefore the shortage puts an upward pressure on price, and the price increases until the market reaches equilibrium where quantity demanded = quantity supplied.

iii) If cost of production increases, less number of labors will be hired and supply will decrease, shifting the supply curve leftward. As a result, equilibrium price will increase.

Answer: option 4

iv) If a sales tax is imposed on steel Consumption, the price increase will cause a decrease in demand. This will shift the demand curve leftward. As a result, equilibrium price decreases.

Answer: option 2