Question

2 Suppose the following are the supply and demand schedules for rice in India.

Demand Schedule for Rice

Price ($ per Pound)	Quantity Demanded (pounds/week)
0.50	700
1.00	500
1.50	300
2.00	100
2.50	0

Supply Schedule for Rice

Price ($ per pound)	Quantity Supplied (pounds/week)
0.50	100
1.00	200
1.50	300
2.00	400
2.50	500

1. Graph this market on a clearly labeled supply-demand diagram. Is there an equilibrium? If yes, what are the price and quantity? If no, please describe the relationship between quantity supplied and quantity demanded

2. Use the arc elasticity formula (i.e. the formula used in class to calculate percentage changes) to calculate the elasticity of demand and supply between each of the prices. Show your work.

3. Suppose an improved technology increases the capacity of the Indian rice market such that at each price the market can supply 300 more pounds per week at each price. Please re-evaluate your answer to part a.

Answer 1

(a)

In following graph, equilibrium is at point A where demand and supply curves intersect with price P0 (= $1.5) and quantity Q0 (= 300).

(b)

Elasticity of demand (Ed) = (Change in quantity demanded / Average quantity demanded) / (Change in price / Average price)

Elasticity of supply (Es) = (Change in quantity supplied / Average quantity supplied) / (Change in price / Average price)

P	Change in P	Average P	QD	Change in QD	Average QD	QS	Change in QS	Average QS	Ed	Es
0.5			700			100
1	0.5	0.75	500	-200	600	200	100	150	-0.5	1
1.5	0.5	1.25	300	-200	400	300	100	250	-1.25	1
2	0.5	1.75	100	-200	200	400	100	350	-3.5	1
2.5	0.5	2.25	0	-100	50	500	100	450	-9	1

(c)

New demand/supply schedule as follows.

Price	Demand	Supply	New Supply
0.5	700	100	400
1	500	200	500
1.5	300	300	600
2	100	400	700
2.5	0	500	800

In above graph, new equilibrium is at point B where demand and new supply curves intersect with lower price P1 (= $1) and higher quantity Q1 (= 500).