Assignment 1

Student’s Name: ID:

Question 1

Show and explain how each of the following will affect the current supply (Increase supply or
Decrease Supply) for bicycle.

a. A rise in wage rates

Answer:

b. An increase in the number of sellers of bicycle

Answer:

c. A tax placed on the production of bicycle

Answer:

d. A subsidy placed on the production of bicycle

Answer:

Question 2
Consider the following statements. Show and explain whether the demand curve will shift
leftward/downward or rightward/upward.

a. An increase in income (the good under consideration is an inferior good)

Answer:

b. A rise in the price of a complementary good

Answer:

c. A fall in the price of a substitute good

Answer:

d. A rise in the number of buyers

Answer:

Question 3
Consider the car market during 2018-2019. The equilibrium price of cars remained constant, but
the equilibrium quantity of cars increased. What will be the effect on supply and demand of cars
between 2018 and 2019? Draw a graph and explain.
Answer:
Question 4
Consider the pizza market in BC. Suppose an innovation in cheese processing technology makes
it possible to produce more pizzas at a lower cost than ever before. Holding all other factors
constant, what will be the effect of this technology on pizza market. Draw a graph and explain.
Answer:

 Due to innovation, cost of production is reduced. Thus in same cost, producers can
produce more number of goods.
 This will shift supply curve right side. New supply curve will be S2
 Equilibrium price will increase from P1 to P2 and equilibrium quantity will also
increase from Q1 to Q2

Question 5
Consider the market for soft drinks in Canada, where there are over a thousand stores that sell
soft drinks at any given moment. Suppose the health authority issues a public warning that
consuming soft drinks is not good for health. Holding all other factors constant, what will be the
effect on market? Draw a graph and explain.

Ans:

 Due to health warning, people will reduce consumption because this will be
dangerous to health.
 This will shift demand from D to D1
 This will reduce price from P1 to P2 and quantity will be also reduced from Q1 to Q2
Question 6
The following table contains information about the wheat market. Use the table to answer the
following questions.

 Price per bushel (in $) Quantity Demanded (bushels) Quantity Supplied (bushels)
2 40,000 0
4 36,000 4,000
6 30,000 8,000
8 24,000 16,000
10 20,000 20,000
12 18,000 28,000
14 12,000 36,000
16 6,000 40,000

a) What are the equilibrium price and quantity of wheat?

Answer:
Equilibrium price and quantity

 It can be found when demand and supply are same

 At this level P = $10 and Q = 20000 units. This is equilibrium point

b) Suppose the prevailing price is US$12 per bushel. Is there a shortage or a surplus in the
market?
Answer:
If price is $12,
  When P = $12, demand is 18000 units and supply is 28000 units
 Price is above equilibrium price which will result in surplus.

c) What is the quantity of the shortage or surplus?

Answer:
Surplus or shortage

 Surplus = Supply - Demand = 28000 - 18000

 = 10000 is surplus when P = $12

d) How many bushels will be sold if the market price is US$4 per bushel?
Answer:
When P = $4, number of units sold

 When P = $4, supply is 4000 units and demand is 36000 units

 So, supply is less than demand. Whichever is lesser will be sold
 Thus, 4000 units will be sold in the market

e) If the market price is US$8 per bushel, what must happen to restore equilibrium in the
market? Explain
Answer:

If market price is $8

 In order to restore equilibrium, price required to be increased

 Price can be increased by taxing in a way that price is exactly increased by $2
 When new price after tax is $10, initial equilibrium will be established

f) Suppose the market price is US$16 per bushel. Is there a shortage or a surplus in the
market?

Answer:
If market price is $16

 When P = $16, demand is 6000 units and supply is 40000 units

 Supply is more than demand
 Thus, there is surplus in the market
g) What is the quantity of the shortage or surplus?
Answer:
The Quantity of Shortage and Surplus can be found as following
(SURPLUS)
Let the demand is 6000 units and supply is 40000 units. Then there is surplus which
can be calculated as
Surplus = Supply – Demand
Here in our case Supply = 40000 units , Demand= 6000 units
So
Surplus = 40000-6000
Surplus = 34000 units

(SHORTAGE)

It occurs when the supply is less than the demand.

The Quantity of Shortage can be found as following

Let the demand is 40000 units and supply is 10000 units. Then there is shortage which
can be calculated as
Shortage = Demand- Supply
Here in our case Demand = 40000 units , Supply= 10000 units
So
Shortage = 40000-10000
Shortage = 30000 units

h) How many bushels will be sold if the market price is US$14 per bushel?
Answer:

If the price is $14

P= $14 , Demand = 12000 units , Supply = 36000 units

As clearly seen ,
It is a case of surplus , because the supply is greater than the demand . So which so ever
is less will be the quantity of units likely to be sold. But there is surplus supply so the
vendor / seller tends to sale maximum of it .
It is universal rule of economics when there is surplus in the supply , the price of the
product falls and vice versa.

If the surplus is restrained from the market then the demand i-e 12000 units , will be the
number of sold bushels
 But keeping the universal rule of economics and standard situations , the rate will fall , as
it may tend to touch $10 per bushel so that all of the supply will be sold with less loss.

i) If the market price is US$16 per bushel, what must happen to restore equilibrium in the
market? Explain
Answer:

When market price is $16 ,

Demand = 6000
Supply= 40000

To restore the equilibrium,

 It is the case of Surplus , that there is more supply than the demand
 The dealers must overcome this situation as the product if returned back will cost
him loss i-e in the form of lodging in out and transportation and re-agreement
charges / costs.
 To achieve the equilibrium the price must be lowered to approx. $10 where there
is equilibrium.