Question

1. Consider the following information regarding the quantity of corn demanded and supplied per month at a number of prices.

Price per bushel	quantity demand	quantity supplied
$.40	39,000	83,000
$.35	48,000	78,000
$.30	58,000	74,000
$.25	67,000	67,000
$.20	75,000	62,000
$.15	81,000	59,000

1. What is the equilibrium price? What is the equilibrium quantity?
2. Describe the situation when the price is at $.40 per bushel and predict what will happen.
3. Describe the situation when price is at $.15 per bushel and predict what will happen.
4. Explain what would happen if a serious transport strike reduced corn output supplied (at each price) by 30,000 bushels.

Answer the questions below (including the more difficult thought questions) using graphs and a brief explanation of curve shifts and why they happen.

1. Consumers consider steak to be a normal good. Show graphically what will happen to the equilibrium price and quantity of steak when consumer income increases.
2. People’s taste for pizza increases. At the same time, Pizza Hut builds several new restaurants. Show what will happen to equilibrium price and quantity of pizza.
3. Consumers consider spam to be an inferior good. Show graphically what will happen to the equilibrium price and quantity of spam when consumer income decreases.
4. The price of hamburger falls. Show what will happen to equilibrium price and quantity of hot dogs.
5. New Federal regulations increase the cost of producing all types of meat. Show what will happen to the equilibrium price and quantity of hot dog buns
6. New technology improves production of home satellite dishes. At the same time, the price of cable TV decreases. Show what will happen to equilibrium price and quantity of satellite systems.

More difficult thought questions

1. A freeze destroys Florida’s orange crop. Show graphically what will happen to the equilibrium price and quantity of apple juice.
2. Economic stress causes more heart attacks. At the same time, more organ donors are living longer. Show what will happen to equilibrium price and quantity of heart transplants.               

Answer 1

The equilibrium price and quantity are determined by the intersection of supply and demand. The equilibrium price is $0.25 and quantity is 67,000.

When price is $0.40 per barrel, 83,000 barrels will be supplied and 39,000 barrels will be demanded.There will be excess supply of 44,000 barrels.

When there are higher prices and excess supply, sellers will have excess inventories and the competition among sellers will put the downward pressure on price as there will be some sellers who will be willing to supply at lower prices. As prices fall, the consumer demand will increase the equilibrium price is reached once again.

When price is $0.15 per barrel, 59,000 barrels will be supplied and 81,000 barrels will be demanded.There will be excess demand of 22,000 barrels

When lower prices are lower than equilibrium price due to excess demand, there will shortage of goods, putting an upward pressure on the price as there will be more buyers chasing the available goods. As price increases the suppliers will start producing more but the demand from buyers will decrease. The price and quantity to its equilibrium level will once again come down to the equilibrium position.

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