Question

question1: An airline charges $2,100 for a first-class roundtrip ticket from Boston to Los Angeles and charges $370 for an economy-class roundtrip ticket on the same route. The airline observes that every seat in economy class is full and that much of the first-class cabin is empty. Sketch a graph that represents the supply and demand for first-class roundtrip tickets in this market. Briefly explain why this first-class ticket market is not in equilibrium when the daily price of a ticket is $2,100. On your graph, clearly indicate the gap that represents the size of the shortage or surplus this market is experiencing.

Question2: Suppose that the (inverse) demand equation for bananas is P=60-8Qd and the (inverse) supply curve for bananas is P = 4Qs in a local market. Quantities are measured in 10- pound bunches of bananas per day, and price is measured in dollars per bunch of bananas. Find the equilibrium quantity and price for a 10-pound bunch of bananas in this market. Suppose that the recent hurricane has harmed banana crops, such that the supply of bananas falls. The more limited supply of bananas results in a new (inverse) supply curve of bananas as follows: P=12 + 4Qs. Find the new market equilibrium quantity and price under these conditions. (Assume that the demand equation remains the same.) Compare the original equilibrium quantity and price to the new equilibrium quantity and price. Has price fallen or risen? Has quantity exchanged fallen or risen? Sketch a supply-and-demand graph to illustrate the market before and after the harm to the crops (graph paper is not required for this sketch). In this example, has supply increased or decreased? Are the directions of change in quantity and price that you found from your computations consistent with this supply increase or decrease?

Answer 1

1) Ans: When the daily price of a ticket is $2,100,  first-class ticket market is not in equilibrium. Supply is greater than demand. So the market is experiencing Surplus. (a - b) is indicated as the amount of surplus in the diagram below. Equilibrium price and quantity are indicated as p1 and q1. a is the quantity demanded when the daily price of a ticket is $2,100 and b is the quantity supplied. Hence (a to b) represents the surplus amount.

2) Ans: The demand equation for bananas is P=60-8Qd and the (inverse) supply curve for bananas is P = 4Qs

under equilibrium condition, Qd = Qs

or, (60-P)/8 = P/4

or, 15- P/4 = P/2

or, P/2 + P/4 = 15

or, P = 20

So, the equilibrium price is $20 for a 10-pound bunch of bananas.

And, equilibrium quantity = 20/ 4 = 5 units

Now, that the recent hurricane has harmed banana crops, such that the supply of bananas falls.

New supply curve of bananas as follows: P=12 + 4Qs. The demand curve remains the same.

At new equilibrium, (P-12)/4 = (60-P)/8

or, 8(P-12) = 4(60-P)

or, 2P-24 = 60-P

or, P = 28

Hence price has increased to $28 for a 10-pound bunch of bananas.

And, new equilibrium quantity is (28-12)/4 = 4 units

As the recent hurricane has harmed banana crops, the supply decreases. So, the supply curve shifts to the left. As a result the price rises and quantity in new equilibrium reduces from 5 units to 4 units.