Question

Your analysis of the market for carrots revealed the following information about the price; quantity demanded(Qd) and quantity supplied (Qs).price($ per pound)

Price ($ per pound)	Qd	Qs
0.5	9	5
1	8	8
2	6	14
3	4	20
4	2	26

1. Please Sketch these curves.

2. What is the equilibrium price and quantity?

3. Suppose the household experiences a drop-in income, what happens to the demand curve? Does it affect the equilibrium price and quantity? If so, how?

4. From your original equilibrium point, assume that the producer acquired a new piece of equipment which allows him to be more efficient. Does this affect the supply curve and the equilibrium point? If so, please indicate how?

5. From your original equilibrium position, assume that government intervenes and sets a price cap at 50cents per pound. Would the market still be in equilibrium? If not, state why not? Suppose government sets a price at $4 per pound? Does this after the market Equilibrium?

Answer 1

b). The equilibrium price is and the quantity is .

c). The income of the households and the demand for the goods and services is directly related that is when the income increases the demand increases and vice versa, here it is a decrease in income so the demand will decrease and the decrease is a leftward shift of the demand curve. When the demand curve shifts to the left the equilibrium price and the quantity decreases.

d). The more efficient technology allows them to produce more cheaply than before and it is an increase in the supply so the supply curve would shift to the right and so when the supply curve shifts to the left the equilibrium price decreases and the quantity increases.

e). If the government sets the price cap the market will not be in equilibrium , this is because at a price of $0.5 the quantity demanded exceeds the quantity supplied and there is actually a shortage of the product.

If the government sets a price of $4, there is actually surplus of the commodity the quantity supplied exceeds the quantity demanded.

The government can alter the market prices by setting a price controls, the common price controls are price ceiling and the price floor. The price ceiling is set below the equilibrium price and the price floor is set above the equilibrium price. In this question the $0.5 price fixed by the government is a price ceiling and the $4 is a price floor. When the price sets at the $.5 the demand is 9 and the supply is 5 so there is shortage, the equilibrium is not there , like wise if the government sets the price $4 the supply is 20 and the demand is 4 , and there is surplus of the commodity.