a. What will be the market or equilibrium price? What is the equilibrium quantity? Fill in the surplus-shortage column and use it to explain why your answers are correct.
b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price "P" and the equilibrium quantity "Q."
c. Why will $3.40 not be the equilibrium price in this market? Why not $4.90? "Surpluses drive prices up; shortages drive them down." Do you agree?
Data from top to bottom: -13; -7; 0; +7; +14; and +21.
(a) Pe = $4.00; Qe = 75,000. Equilibrium occurs where there is neither a shortage nor a surplus of wheat. At the immediately lower price of $3.70, there is a shortage of 7,000 bushels. At the immediately higher price of $4.30, there is a surplus of 7,000 bushels. (See above.)
(b) Quantity (thousands) of bushels.
(c) Because at $3.40 there will be a 13,000 bushel shortage, which will drive price up. Because at $4.90 there will be a 21,000 bushel surplus, which will drive the price down. Quotation is incorrect; just the opposite is true.
3-8
How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.
a. Supply decreases and demand is constant.
b. Demand decreases and supply is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
h. Demand decreases and supply decreases.
ANSWER:
(a) Price up; quantity down.
(b) Price down; quantity down.
(c) Price down; quantity up.
(d) Price indeterminate; quantity up.
(e) Price up; quantity up.
(f) Price down; quantity indeterminate.
(g) Price up; quantity indeterminate.
(h) Price indeterminate; quantity down.
3-13
Refer to the table in question 7. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically.
ANSWER:
At a price of $3.70, buyers will wish to purchase 80,000 bushels, but sellers will only offer 73,000 bushels to the market. The result is a shortage of 7,000 bushels. The ceiling prevents the price from rising to encourage greater production, discourage consumption, and relieve the shortage. See the graph below.
At a price of $4.60, buyers only want to purchase 65,000 bushels, but sellers want to sell 79,000 bushels, resulting in a surplus of 14,000 bushels. The floor prevents the price from falling to eliminate the surplus. See the graph below.
