1. equilibrium\na. draw a graph with hypothetical demand and supply curves. label the axes, each curve, the…

1. equilibrium\na. draw a graph with hypothetical demand and supply curves. label the axes, each curve, the equilibrium, the equilibrium price, $p^{*}$, and the equilibrium quantity, $q^{*}$. (3 points)\nb. if the market price is below $p^{*}$, what will happen to inventories and what will buyers do to cause the price to rise? (3 points)\nc. if the market price is above $p^{*}$, what will happen to inventories and how will sellers react? (3 points)\nd. equilibrium means the quantity supplied equals the quantity demanded. what else does equilibrium mean? (3 points)\n2. price ceiling\na. draw a graph with hypothetical demand and supply curves. label the axes, each curve, and the equilibrium. pick a price - ceiling price below the equilibrium price, and label it on your graph as $p^{c}$. (3 points)\nb. what is a price ceiling? (3 points)\nc. why dont we choose a price ceiling above the equilibrium price? (3 points)\nd. on your graph, indicate the quantity consumers want to buy, $q^{d}_{c}$, and the quantity sellers want to sell, $q^{s}_{c}$ (3 points)\ne. does price floor cause a shortage or does it cause a surplus? explain in words. (3 points)\n3. the government occasionally uses price supports to aid farmers. a price support works like this: the government promises to buy all the produce the farmer cannot sell in the market at some pre - set price. for example, if the price of lettuce was $.30 a head in the market, the government might offer a price support of $.50 a head. show and explain that the effect of a price support is the same as a price floor. you should use graphs to aid your explanation. (9 points)

1. equilibrium\na. draw a graph with hypothetical demand and supply curves. label the axes, each curve, the equilibrium, the equilibrium price, $p^{*}$, and the equilibrium quantity, $q^{*}$. (3 points)\nb. if the market price is below $p^{*}$, what will happen to inventories and what will buyers do to cause the price to rise? (3 points)\nc. if the market price is above $p^{*}$, what will happen to inventories and how will sellers react? (3 points)\nd. equilibrium means the quantity supplied equals the quantity demanded. what else does equilibrium mean? (3 points)\n2. price ceiling\na. draw a graph with hypothetical demand and supply curves. label the axes, each curve, and the equilibrium. pick a price - ceiling price below the equilibrium price, and label it on your graph as $p^{c}$. (3 points)\nb. what is a price ceiling? (3 points)\nc. why dont we choose a price ceiling above the equilibrium price? (3 points)\nd. on your graph, indicate the quantity consumers want to buy, $q^{d}_{c}$, and the quantity sellers want to sell, $q^{s}_{c}$ (3 points)\ne. does price floor cause a shortage or does it cause a surplus? explain in words. (3 points)\n3. the government occasionally uses price supports to aid farmers. a price support works like this: the government promises to buy all the produce the farmer cannot sell in the market at some pre - set price. for example, if the price of lettuce was $.30 a head in the market, the government might offer a price support of $.50 a head. show and explain that the effect of a price support is the same as a price floor. you should use graphs to aid your explanation. (9 points)

Answer

Brief Explanations:

1. A.

Draw a two - axis graph. The x - axis represents quantity (Q), the y - axis represents price (P). Draw a downward - sloping demand curve labeled D and an upward - sloping supply curve labeled S. The intersection of D and S is the equilibrium point. Label the equilibrium price as $P^{}$ on the y - axis and the equilibrium quantity as $Q^{}$ on the x - axis.

B.

If the market price is below $P^{*}$, quantity demanded exceeds quantity supplied. Inventories will decrease as buyers compete for the limited goods, and they may bid up the price.

C.

If the market price is above $P^{*}$, quantity supplied exceeds quantity demanded. Inventories will increase, and sellers may lower prices to clear the excess inventory.

D.

Equilibrium also means there is no tendency for the price or quantity to change in the absence of external shocks, as the forces of supply and demand are balanced.

2. A.

Draw a two - axis graph with quantity (Q) on the x - axis and price (P) on the y - axis. Draw a demand curve D and a supply curve S. Mark the equilibrium point. Choose a price below the equilibrium price and label it $P^{C}$.

B.

A price ceiling is a legal maximum price set by the government, below the equilibrium price in a market, to protect consumers.

C.

A price ceiling above the equilibrium price is ineffective because the market will naturally settle at the equilibrium price, and the ceiling has no binding effect.

D.

On the graph, find the quantity on the demand curve at price $P^{C}$ and label it $Q^{D}{C}$, and the quantity on the supply curve at price $P^{C}$ and label it $Q^{S}{C}$.

E.

A price floor causes a surplus. A price floor is a legal minimum price. When it is set above the equilibrium price, quantity supplied exceeds quantity demanded, resulting in a surplus of goods.

3.

Draw a demand - supply graph. Mark the equilibrium price $P^{}$ and quantity $Q^{}$. Set a price support (price floor) $P_{s}$ above $P^{*}$. At $P_{s}$, quantity supplied $Q^{S}$ is greater than quantity demanded $Q^{D}$. The government steps in to buy the surplus ($Q^{S}-Q^{D}$), similar to a price floor situation where the market has an excess supply that needs to be addressed.

Answer:

1. A.

Graph with labeled axes, curves, equilibrium, $P^{}$ and $Q^{}$ as described.

B.

Inventories decrease; buyers bid up the price.

C.

Inventories increase; sellers lower prices.

D.

No tendency for price/quantity to change without external shocks.

2. A.

Graph with labeled axes, curves, equilibrium and $P^{C}$ as described.

B.

Legal maximum price below equilibrium to protect consumers.

C.

Ineffective as market settles at equilibrium.

D.

$Q^{D}{C}$ and $Q^{S}{C}$ labeled on graph.

E.

Causes a surplus as quantity supplied > quantity demanded.

3.

Graph and explanation showing price support is like a price floor with surplus and government intervention.