Question

1. Draw supply and/or demand diagrams to illustrate how each of the following events would affect the market for wood. In each case show the original price and quantity (P_o and Q_o) and the new price and quantity (P₁ and Q₁).

1. A decrease in the quantity demanded      

2. In an attempt to reduce fire hazards, several American cities adopt regulations that restrict the use of wood products in the construction of houses.

3. The government of BC takes steps to preserve more old growth forest.    

4. Forestry research leads to the development of new methods of cheaply producing high yields of wood from forest plantations.

5. New non-wood building products (such as vinyl siding and particle boards made from rice hulls) are developed and improved. .

2. Using the production possibility frontier graph and explains the following concepts.

              i) Unemployed resources

              ii) Scarcity

              iii) Production efficiency

              iv) Opportunity cost

              v) Economic growth

3. Given the following information

          Price                         Quantity Demanded                                   Quantity Supplied

                     200                                          12                                                                0

                     400                                          10                                                                2

                     600                                          8                                                                  4

                     800                                          6                                                                   6

                    1000                                         4                                                                   8

                    1200                                         2                                                                   10

                    1400                                         0                                                                   12

                    1600                                         0                                                                   14

1. What is the equilibrium P and Q?
2. What is the Consumer Surplus?
3. What is the producer surplus?
4. If the government decided to introduce a price floor of 1000, how much would it cost the government?
5. What is the deadweight loss?
6. If the quantity demanded increased by 4 at all prices what is the new equilibrium P and Q?
7. What is the new consumer surplus?
8. If the two demand curves represented two individuals who together comprised of the whole market for a good that was non excludable and non rival what would the consumer surplus be?

Answer 1

1)

a)

In the above diagram, O is the initial equilibrium point, P0 is the initial equilibrium price and Q0 is the initial equilibrium output.

A decrease in the quantity demanded of woods will cause the demand curve to shift to the left. The new demand curve is D1. The new equilibrium point is A, the equilibrium price has reduced to P1 and equilibrium output has reduced to Q1.

b)

In the above diagram, O is the initial equilibrium point, P0 is the initial equilibrium price and Q0 is the initial equilibrium output. In an attempt to reduce fire hazards, many American cities adopt regulations that restrict the use of wood in the construction of houses. As such, the quantity demanded by consumers for constructing house of wood will decrease. Hence the demand curve will shift to the left. As demand curve will shift to the left, the new equilibrium point is A where original supply curve S and new demand curve D1 intersect. The equilibrium price will fall to P1 and equilibrium output will reduce to Q1.

c)

As the government of BC takes more steps to preserve the growth of old forest, the suppliers of wood would not be able to extract more wood from the forest. As such , the supply of wood will decrease. In the above diagram, O is the initial equilibrium point, P0 is the initial equilibrium price and Q0 is the initial equilibrium output. As supply will decrease, the supply curve will shift to the left . The supply curve will shift from S to S1. The new equilibrium point is A where original demand curve and new supply curve intersect. The equilibrium price will increase to P1 and equilibrium output will fall to Q1.

d)

With the development of new methods of cheaply producing high yielding wood from forest plantation, the quantity supplied of wood will increase. As such, the supply curve will shift to the right. In the above diagram, O is the initial equilibrium point, P0 is the initial equilibrium price and Q0 is the initial equilibrium output. As supply of wood will increase, the supply curve will shift to the right from S to S1. The new equilibrium point is A obtained by the intersection of original demand curve and new supply curve . Equilibrium price will fall to P1 and equilibrium output will increase to Q1.