Answer the following questions and provide explanations as required.
1. Using the information below on the market demand and supply for compact disks, graph the demand and supply curves and answer the questions below.
|
PRICE compact disks
|
QUANTITY DEMANDED compact disks
|
QUANTITY SUPPLIED compact disks
|
|
$18
|
1,000,000 units
|
5,500,000 units
|
|
17
|
2,000,000 units
|
5,000,000 units
|
|
16
|
3,000,000 units
|
4,500,000 units
|
|
15
|
4,000,000 units
|
4,000,000 units
|
|
14
|
5,000,000 units
|
3,500,000 units
|
|
13
|
6,000,000 units
|
3,000,000 units
|
|
12
|
7,000,000 units
|
2,500,000 units
|
|
11
|
8,000,000 units
|
2,000,000 units
|
|
10
|
9,000,000 units
|
1,500,000 units
|
|
9
|
10,000,000 units
|
1,000,000 units
|
(a) What is the equilibrium price and quantity?
(b) At a market price of $11, there exists a shortage or surplus and what is it equal to?
(c) At a market price of $16, there exists a shortage or surplus and what is it equal to?
2. There is an increase in demand for personal computers and at the same time their input costs fall increasing supply, explain and illustrate how these changes will affect the supply and demand curves and consequently equilibrium price and quantity.
3. Suppose there is an increase in both consumer income and in the price of jet fuel, an important resource used to produce air travel. If air travel is a normal good, how will these changes influence the price and quantity purchased of air travel? Explain and illustrate how these changes will affect the supply and demand curves and consequently equilibrium price and quantity.
4. Explain and illustrate the difference between a price ceiling and a price floor and the major drawbacks of each.