Question

MARKET EFFICIENCY

IN-CLASS WORKSHEET 2

This question examines the market for peanut butter. You will use the formulas for a demand and supply curve to identify the equilibrium market price and quantity and analyze the benefits that consumers and producers derive from participation in this market.

Below, you have the formulas for the demand curve and the supply curve for jars of peanut butter. If you plug any price into the formula for the demand function, you get the quantity demanded at that price. If you plug any price into the supply function, you get the quantity supplied at that price.

The Demand Function for peanut                            The Supply Function for peanut

butter:                                                                        butter:

                          Q = 9 − P                                                                   Q = ½P

                         

Task 1: In the space below, sketch out the demand and supply curves for jars of peanut butter. Remember to place “Jars of Peanut Butter” on the horizontal axis and “Price” on the vertical axis.

Task 2: What is the equilibrium price and quantity in this market?

Task 3: In your graph above, shade the area that represents consumer surplus in red.

Task 4: In your graph above, shade the area that represents producer surplus in blue.

Answer 1

Task 1:

Demand is red line and Supply is Blue Line as shown below in the graph,

Task 2:

Equilibrium occurs at the point where demand equals supply i.e., at the intersection of demand and supply curve.

Equilibrium Price = 6

Equilibrium Quantity = 3

As shown below in the graph,

(c) Consumer surplus is the area below the demand curve and above the price as shown below,

(d)

Producer surplus is the are below the equilibrium price and above the supply curve as shown below,