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Chapter 2: Q 7 (page 78)
What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling
on the quantity supplied? Why exactly does a price ceiling cause a shortage?
excess demand
supply remains same
shortage occurs
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Example 2.9 (page 76) analyzes the world oil market. Using the data given in that example:
a. Show that the short-run demand and competitive supply curves are indeed given by
D = 36.75 - 0.035P
SC= 21.85 + 0.023P
b. Show that the long-run demand and competitive supply curves are indeed given by
D = 45.5 - 0.210P
SC= 16.1 + 0.138P
c. In Example 2.9 we examined the impact on price of a disruption of oil from Saudi Arabia. Suppose that instead of a decline in supply, OPEC production increases by 2 billion barrels per year (bb/yr) because the Saudis open large new oil fields. Calculate the effect of this increase in production on the price of oil in both the short run and the long run.
Suppose the demand curve for a product is given byQ= 300 - 2P+ 4I, whereIis average income measured in thousands of dollars. The supply curve isQ= 3P- 50.
a. IfI= 25, find the market-clearing price and quantity for the product.
b. IfI= 50, find the market-clearing price and quantity for the product.
c. Draw a graph to illustrate your answers.
A vegetable fiber is traded in a competitive world market, and the world price is \(9 per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:
| PRICE | U.S. SUPPLY (MILLIONS) | U.S. (DEMAND) (MILLIONS) |
| 3 | 2 | 34 |
| 6 | 4 | 28 |
| 9 | 6 | 22 |
| 12 | 8 | 16 |
| 15 | 10 | 10 |
| 18 | 12 | 4 |
What is the equation for demand? What is the equation for supply?
At a price of \)9, what is the price elasticity of demand? What is it at a price of \(12?
What is the price elasticity of supply at \)9? At $12?
In a free market, what will be the U.S. price and level of fiber imports?
Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows:
PRICE (DOLLARS) | DEMAND (MILLIONS) | SUPPLY (MILLIONS) |
| 60 | 22 | 14 |
| 80 | 20 | 16 |
| 100 | 18 | 18 |
| 120 | 16 | 20 |
a. Calculate the price elasticity of demand when the price is \(80 and when the price is \)100.
b. Calculate the price elasticity of supply when the price is \(80 and when the price is \)100.
c. What are the equilibrium price and quantity?
d. Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so, how large will it be?
Refer to Example 2.10 (page 81), which analyzes the effects of price controls on natural gas.
Using the data in the example, show that the following supply and demand curves describe the market for natural gas in 2005–2007:
Supply: Q = 15.90 + 0.72PG+ 0.05PO
Demand: Q = 0.02 - 1.8PG+ 0.69PO
Also, verify that if the price of oil is \(50, these curves imply a free-market price of \)6.40 for natural gas.
Suppose the regulated price of gas was \(4.50 per thousand cubic feet instead of \)3.00. How much excess demand would there have been?
Suppose that the market for natural gas remained unregulated. If the price of oil had increased from \(50 to \)100, what would have happened to the free market price of natural gas?
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