Ayah Ali
Q.1. The market for pizza has the following demand and supply schedules:
a. Graph the demand and supply curves (2 points)
b. What is the equilibrium price and quantity in this market? (2 points)
The equilibrium price in this market is 6 pizzas.
The equilibrium quantity in this market is $81.
b. If the actual price in this market were above the equilibrium price, what would drive the
market toward the equilibrium? (2 points)
The quantity supplied would exceed the quantity demanded. This would decrease sales
which will result in suppliers reducing the price of pizza to gain sales. This would then
drive the market toward equilibrium.
c. If the actual price in this market were below the equilibrium price, what would drive the market
back toward equilibrium? (2 points)
The quantity demanded would exceed the quantity supplied. Because of this, suppliers
could increase prices without the risk of losing sales. Eventually, the price will reach $6,
the equilibrium price.
Q.2. Suppose the demand of a particular product is represented by the following linear demand
function Demand for Product Y = 200 – 4P
Calculate the quantity demand at the market prices $10, $20, $30, $40, and $50. Construct a
demand schedule in a table and plot the demand curve for this demand function. (4 points)
Q.3. Below are the equations for the demand and supply curves:
​Demand curve: Qd=4200−2P
Supply curve: Qs=700+5P
Compute the equilibrium price? (4 points)
4200-2P = 700+5P
7P = 3500
P = 500
The equilibrium price is $500.
The questions below are based on the figure above:
1) What is the original equilibrium price and quantity? (2 points)
The original equilibrium price is $500 and the original equilibrium quantity is 15000.
2) Effect of greater income or change in tastes shifts the demand curve for rental housing
to the right. What does this imply? (2 points)
This causes a shift in equilibrium from point E to E1 and the quantity increases from
15000 to 17000.
3) With change in demand, what is the new equilibrium price and equilibrium quantity? (2
points)
New Price: $600
New Quantity: 17000
4) Equilibrium at E1 is with or without government intervention? (1point)
Equilibrium at E1 is without government intervention because there’s a ceiling of quota
and price restriction from the government.
5) Govt. imposes a price ceiling to prevent the price from rising. Look at the graph and tell
what is the price imposed by ceiling? (1point)
The price imposed by ceiling is $500.
6) Since the price is not permitted to rise due to ceiling, the quantity supplied remains at
what price? (1point)
The quantity supplied remains at 15,000.
7)
How much is the excess demand or shortage resulting from ceiling? (1point)
4000 is the shortage resulting from ceiling.
8) Is the price ceiling shown in the graph above ‘binding’ or ‘non-binding’? Please explain
why? (2 points)
It’s binding because the price is below the new equilibrium level and, as a result, it
benefits consumers which serves the purpose of imposing a price ceiling.