Question

In Merageville, if the price of gasoline is zero, daily quantity demanded is 1000 gallons. For every increase in price of 10 cents, daily quantity demanded drops by 10 gallons. At a price of zero, quantity supplied is zero, but for every increase in price of 10 cents, quantity supplied increases by 15 gallons.

When vacation time comes around, the quantity demanded at any price increases by 200 gallons. Draw a new graph, showing the supply curve, and both the old and new demand curves. Show how the equilibrium price and quantity have changed. What are the new price and quantity traded in the Merageville gasoline market?

Answer 1

We have the following information

The price of gasoline is zero, the daily quantity demanded is 1000 gallons. For every increase in the price of 10 cents, the daily quantity demanded drops by 10 gallons. So, the demand curve equation will look like the following

Demand = 1,000 – (1×P); where P is the price in cents

On the other hand, at a price of zero, the quantity supplied is zero, but for every increase in the price of 10 cents, quantity supplied increases by 15 gallons. So, the supply curve equation will look like the following

Supply = 1.5P; where P is price in cents

Equilibrium price and quantity are

1000 – 1P = 1.5P

2.5P = 1000

Equilibrium price = 400 cents or $4

Equilibrium quantity = 1000 – 1P

Equilibrium quantity = 1000 – (1 × 400)

Equilibrium quantity = 1000 – 400

Equilibrium quantity = 600

When vacation time comes around, the quantity demanded at any price increases by 200 gallons. So, the new demand curve equation is following

Demand = 1,200 – (1×P); where P is the price in cents

Equilibrium price and quantity are

1200 – 1P = 1.5P

2.5P = 1200

Equilibrium price = 480 cents or $4.8

Equilibrium quantity = 1200 – 1P

Equilibrium quantity = 1200 – (1 × 480)

Equilibrium quantity = 1200 – 480

Equilibrium quantity = 720