Question

Consider the competitive market for trader joe’s French brioche in Buffalo, The demand is given by Qd=100 – 5P, The supply is Qs=10+4P, a) Draw the supply and demand curve. b) What are the equilibrium point (equilibrium price and quantity)? c) Calculate the price elasticity of demand and price elasticity of supply at the equilibrium point, determine whether its elastic or inelastic? d) Suppose another trader joe store will open in buffalo, increasing the supply of French brioche by 18 at any price, what will happen to the market clearing price and quantity (hint: what will be the new supply curve, what will be the new equilibrium point) e) Suppose the government sets a price ceiling of $7 per unit of French brioche, will there be excess supply or excess demand? How much is it?

Answer 1

The demand is given by Qd=100 – 5P, The supply is Qs=10+4P,

a) Below is the graph showing the supply and demand curve.

b) The equilibrium point is at E where the equilibrium price is $10 and quantity is 50 units

c) The price elasticity of demand at the point of equilibrium is ed = price coefficient x price / quantity = -5*10/50 = -1 and similarly the price elasticity of supply at the equilibrium point is 4*10/50 = 0.8, Demand is unitary elastic and supply is relatively inelastic

d) Suppose another trader joe store will open in buffalo, increasing the supply by 18 at any price, the new market clearing price is now $8 and quantity is 60 units. The new point is at F

e) Now the government sets a price ceiling of $7 per unit. As this price is below the market price of $8 there is a shortage. quantity demanded is 100-5*7 = 65 and quantity supplied is 28 + 4*7 = 56 so the shortage is 9 units.

At the original demand and supply schedules the quantity demanded is 100-5*7 = 65 and quantity supplied is 10 + 4*7 = 38 so the shortage is 27 units.