Consider the supply and demand for cell phones. The market demand for cars is given by Q_D = 7000-30P and supply is given by Q_S = 1000
a) Find the equilibrium price and quantity.
Suppose that consumers change their expectations and believe their future income will be lower. This causes the demand curve to shift to Q_D=6500-30P
b) If prices are sticky, does this shock lead to a surplus or a shortage? By how much?
c) If prices are flexible, does this shock lead to inflation or deflation? By how much?
Consider the supply and demand for cell phones. The market demand for cars is given by Q_D = 7000-30P and supply is given by Q_S = 1000
a) Find the equilibrium price and quantity.
Suppose that consumers change their expectations and believe their future income will be lower. This causes the demand curve to shift to Q_D=6500-30P
b) If prices are sticky, does this shock lead to a surplus or a shortage? By how much?
c) If prices are flexible, does this shock lead to inflation or deflation? By how much?
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Related questions
Questions 1 and 2 do not need to be answered, they are just there for questions 3 and 4. Only bolded need answered.
1.Graph the following market demand function Q = 300-25P, plotting P (prices) on the vertical axis, and Q (quantity), on the horizontal axis. Next, show how much quantity demanded changes when the price of the good given by this demand function increases from $5 to $7?
2.Consider that the demand curve in part (a) above represents the market demand for a steak burger meal in a local area. This local area has three fast-food restaurants that exclusively produce these meals, and they are owned by Sam, Sony, and Sheila. Their supply curves for a steak burger meal are given as follows:
|
Sam's Eatery |
Sony's Hot Meals |
Sheila's "To Go" |
|||
|
Price ($) |
Quantity |
Price ($) |
Quantity |
Price ($) |
Quantity |
|
2.50 |
0 |
2.50 |
5 |
2.50 |
5 |
|
5.00 |
15 |
5.00 |
20 |
5 |
15 |
|
8.00 |
28 |
8.00 |
42 |
8.00 |
30 |
|
10.00 |
35 |
10.00 |
50 |
10.00 |
40 |
|
12.50 |
55 |
12.50 |
75 |
12.50 |
60 |
|
15.00 |
80 |
15.00 |
100 |
15.00 |
80 |
3.Consider the exercise in Question 2. The government now declares that steak burger meals in that locality should sell for $5.00. Given the correct answers in Question 1(b), would this represent a price ceiling or a price floor? Explain. Further, determine what would be the quantity of shortage or surplus that would exist in this market, and be explicit whether it is a surplus or a shortage and explain why.
4.Given the readings you looked at on price controls, what other problems typically arise, besides shortages or surpluses, when price controls are put in place within well-functioning markets?
