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    ECON101 - Quiz

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    Buthaina H
    This document describes the market for gasoline in Dane County, Wisconsin using supply and demand curves. It gives the demand and supply equations, finds the equilibrium price and quantity, and calculates consumer and producer surplus. It then discusses how a pipeline rupture would shift the supply curve left, reducing the available quantity at each price. This shifts the equilibrium to a new higher price and lower quantity, and lowers both consumer and producer surplus.

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    ECON101 - Quiz

    Uploaded by

    Buthaina H
    40 views3 pages
    This document describes the market for gasoline in Dane County, Wisconsin using supply and demand curves. It gives the demand and supply equations, finds the equilibrium price and quantity, and calculates consumer and producer surplus. It then discusses how a pipeline rupture would shift the supply curve left, reducing the available quantity at each price. This shifts the equilibrium to a new higher price and lower quantity, and lowers both consumer and producer surplus.

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    This document describes the market for gasoline in Dane County, Wisconsin using supply and demand curves. It gives the demand and supply equations, finds the equilibrium price and quantity, and calculates consumer and producer surplus. It then discusses how a pipeline rupture would shift the supply curve left, reducing the available quantity at each price. This shifts the equilibrium to a new higher price and lower quantity, and lowers both consumer and producer surplus.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    40 views3 pages

    ECON101 - Quiz

    Uploaded by

    Buthaina H
    This document describes the market for gasoline in Dane County, Wisconsin using supply and demand curves. It gives the demand and supply equations, finds the equilibrium price and quantity, and calculates consumer and producer surplus. It then discusses how a pipeline rupture would shift the supply curve left, reducing the available quantity at each price. This shifts the equilibrium to a new higher price and lower quantity, and lowers both consumer and producer surplus.

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    © All Rights Reserved
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    1- Consider the market for gasoline in Dane County, Wisconsin.

    Units of quantity and price are in


    Thousands of Gallons and $/gallon, respectively. Suppose the gasoline demand is given by:

    d d
    Q = 2000 – 200P where Q = Quantity Demanded and P = Price We have the following information about
    the linear supply function:

     Market research shows that for an increase in price by $1/gallon, quantity supplied increases by 100
    thousand gallons;
     In addition, when the price is $1/gallon, 900 thousand gallons of gasoline are supplied to Dane County.

    s s
    1. a)  Use the information to find the supply function, i.e., determine a and b in Q = a + bP where Q is
    Quantity Supplied and P is Price. (Hint: What is the equation of a line?)
    s s
    We have a slope and a point, determine the line from Q – 900 = 100(P – 1), so the supply function is Q
    = 100P + 800, so a = 800 and b = 100.
    2. b)  Plot the demand and supply curve with Quantity on x-axis and Price on y-axis. Clearly write the
    intercepts on both axes, and denote the area of consumer surplus and producer surplus.
    We have demand and supply function, rewrite the equations to draw the demand and supply curve as: P
    d s
    = 10 – (1/200)Q and P = – 8 + (1/100)Q , respectively. Consumer surplus is the area under demand
    curve above the equilibrium price.

    Producer surplus is the area above supply curve above zero-axis in both quantity and price (i.e. it is
    not the usual triangle but a trapezoid!) under the equilibrium price.

    c) Find the equilibrium price and quantity and the value of consumer and producer surplus.

    From the demand and supply functions, quantity demanded and quantity supplied must be equal at equilibrium.
    d s
    Equate the two to have Q = Q , so 2000 – 200P = 100P + 800, the equilibrium price is P = $4/gallon. The
    equilibrium quantity follows from Q = 2000 – 200(4) = 1200 thousands of gallons.

    The consumer surplus is calculated from the triangle 1⁄2 × (1200) × (10 – 4) = 3600 thousands of dollars. The
    producer surplus is calculated from the trapezoid 1⁄2 × (1200 + 800) × 4 = 4000 thousands of dollars.

    Suppose there is a pipeline rupture in the Midwest, causing a gasoline shortage. Engineers have determined that
    pipeline capacity is reduced by 300 thousand gallons – meaning that, at every price level, there are 300
    thousand fewer gallons of gasoline supplied to Dane County. d) Which curve (demand or supply) is shifted?
    Which direction (leftward or rightward)?

    Since the quantity supplied at each price decreased, this means that the supply curve is shifted leftward.
    6

    e) Determine the equation (demand function or supply function) of the shifted curve.

    Take the supply function from part a), since at every price, quantity supplied is decreased by 300 thousand
    s s
    gallons. So Q = 100P + (800 – 300) = 100P + 500. The shifted supply curve is given by: P = – 5 + (1/100)Q .

    6. f)  Draw the demand and supply curve after the pipeline rupture, clearly compare the shifts.
    7. g)  Determine the equilibrium price and quantity and calculate the value of consumer and producer
    surplus after the pipeline rupture.
    From the demand function and the shifted supply function, quantity demanded and quantity supplied
    d s
    must be equal at equilibrium. Equate the two to receive that Q = Q ; hence, 2000 – 200P = 100P + 500,
    the equilibrium price is P = $5/gallon. The equilibrium quantity follows from Q = 2000 – 200(5) =
    1000 thousands of gallons.

    Consumer surplus is calculated from the triangle 1⁄2 × (1000) × (10 – 5) = 2500 thousands of dollars.
    Producer surplus is calculated from the trapezoid 1⁄2 × (1000 + 500) × 5 = 3750 thousands of dollars.

    5. The market for coffee beans is described by the following equations:

    s
    Q =2P–8

    d
    Q =16–P

    a) Suppose the government sets a price ceiling at $10. Is there a shortage? Is there a surplus?

    No shortage, no surplus - The price ceiling (a maximum price) is set above the market

    price, so it does not change the market equilibrium, which is P = $8 and Q = 8.


    b) The government lowers the price ceiling to $5. Describe the changes in shortage/surplus. Shortage of 9 -
    With a price ceiling of $5, producers supply only 2 units of coffee beans.

    Consumers demand 11 units.


    c) Now suppose a price floor/ceiling has been instituted, which causes a surplus of 9 units. Is this a floor or a
    ceiling? What specific price would create this surplus?
    Price floor, P = $11 - We must find the price at which the horizontal distance between quantity supplied and
    quantity demanded is 9. Supply must be greater than demand for this to be a surplus.

    s d
    Q – Q = 9 = (2P - 8) - (16 - P) 3P – 24 = 9
    3P = 33
    P = 11

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