2 Suppose the following are th
2 Suppose the following are the supply and demand schedules forrice in India.
Demand Schedule for Rice
|
Price ($ per Pound) |
Quantity Demanded (pounds/week) |
|
0.50 |
700 |
|
1.00 |
500 |
|
1.50 |
300 |
|
2.00 |
100 |
|
2.50 |
0 |
Supply Schedule for Rice
|
Price ($ per pound) |
Quantity Supplied (pounds/week) |
|
0.50 |
100 |
|
1.00 |
200 |
|
1.50 |
300 |
|
2.00 |
400 |
|
2.50 |
500 |
- Graph this market on a clearly labeled supply-demand diagram.Is there an equilibrium? If yes, what are the price and quantity?If no, please describe the relationship between quantity suppliedand quantity demanded
- Use the arc elasticity formula (i.e. the formula used in classto calculate percentage changes) to calculate the elasticity ofdemand and supply between each of the prices. Show your work.
- Suppose an improved technology increases the capacity of theIndian rice market such that at each price the market can supply300 more pounds per week at each price. Please re-evaluate youranswer to part a.
Answer:
(a)
In following graph, equilibrium is at point A where demand andsupply curves intersect with price P0 (= $1.5) and quantity Q0 (=300).
(b)
Elasticity of demand (Ed) = (Change in quantity demanded /Average quantity demanded) / (Change in price / Average price)
Elasticity of supply (Es) = (Change in quantity supplied /Average quantity supplied) / (Change in price / Average price)
| P | Change in P | Average P | QD | Change in QD | Average QD | QS | Change in QS | Average QS | Ed | Es |
| 0.5 | 700 | 100 | ||||||||
| 1 | 0.5 | 0.75 | 500 | -200 | 600 | 200 | 100 | 150 | -0.5 | 1 |
| 1.5 | 0.5 | 1.25 | 300 | -200 | 400 | 300 | 100 | 250 | -1.25 | 1 |
| 2 | 0.5 | 1.75 | 100 | -200 | 200 | 400 | 100 | 350 | -3.5 | 1 |
| 2.5 | 0.5 | 2.25 | 0 | -100 | 50 | 500 | 100 | 450 | -9 | 1 |
(c)
New demand/supply schedule as follows.
| Price | Demand | Supply | New Supply |
| 0.5 | 700 | 100 | 400 |
| 1 | 500 | 200 | 500 |
| 1.5 | 300 | 300 | 600 |
| 2 | 100 | 400 | 700 |
| 2.5 | 0 | 500 | 800 |
In above graph, new equilibrium is at point B where demand andnew supply curves intersect with lower price P1 (= $1) and higherquantity Q1 (= 500).
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