Question

In: Economics

The table below shows the supply and demand schedules for sales of bags of chips. PRICE...

The table below shows the supply and demand schedules for sales of bags of chips. PRICE (dollars/bag) QUANTITY DEMANDED QUANTITY SUPPLIED (bags/week) $1.00 200 110 $1.25 175 130 $1.50 150 150 $1.75 125 170 $2.00 100 190 Question 1: What is the market equilibrium? Question 2: Describe the situation in the chip market if the price were $1.75 per bag. Question 3: If the price is $1.75/bag, explain how the market reaches equilibrium. Question 4: A bad year for potatoes decreases the quantity of chips supplied by 45 bags a day at each price. What is the new equilibrium, and how does the market adjust to it? Question 5: Population increases, so the quantity demanded increases by 5 bags a day at each price. More farmers enter the market to supply potatoes, so the supply of chips increases by 50 bags a day at each price. If no other events occur to change supply or demand, what is the new equilibrium and how does the market adjust to it?

Solutions

Expert Solution

Price Quantity demanded Quantity supplied
1.00 200 110
1.25 175 130
1.50 150 150
1.75 125 170
2.00 100 190
1)
Market equilibrium is when quantity demanded equals quantity supplied
Equilibrium price is $1.50 per bag, quantity is 150 bags.
2)

There would be excess supply as quantity supplied is 170 bags and quantity demanded is 125 bags.

3) When we have higher prices and excess supply, manufacturers will have excess inventories and the competition among manufacturers will put the downward pressure on price as there will be some suppliers who will be willing to supply at lower prices. As prices fall, the consumer demand will increase until it finally settles at the equilibrium price.

4)

Price Quantity demanded Quantity supplied New quantity supplied ( Old quantity supplied minus 45 bags)
1.00 200 110 65
1.25 175 130 85
1.50 150 150 105
1.75 125 170 125
2.00 100 190 145

The new equilibrium price is $1.75 and quantity is 125 as quantity demanded equals quantity supplied.

5)

Price Quantity demanded Quantity supplied New quantity demanded New quantity supplied
(Old quantity plus 5 bags a day) (Old quantity plus 50 bags a day)
1.00 200 110 205 160
1.25 175 130 180 180
1.50 150 150 155 200
1.75 125 170 130 220
2.00 100 190 105 240

The new equilibrium price is $1.75 per bag and quantity is 180 bags.


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