EMG5302 - TRADE, FINANCE AND SUSTAINABLE DEVELOPMENT

GROUP HOMEWORK 1

1. Suppose QD = 200 – 4P and QS = 100 describe market demand and market supply in a
given market:

a. Algebraically find equilibrium price and quantity and support your answer graphically.
b. What is unusual about this market? Give an example of a good or service that might be
characterized in this way.

2. Specify the demand and supply functions of a commodity.

3. Show graphically the difference between: (a) changes in quantity demanded and change in
demand; (b) changes in quantity supplied and change in supply; (c) individual demand curve
and market demand curve; and (d) individual supply curve and market supply curve.

4. The demand function for propane is QD = 212 – 20P.

The supply function for propane is QS = 20 + 4P.

a. What is the equilibrium price and quantity?

b. If the government establishes a price ceiling of RM6.00, what quantity will be demanded
and supplied?
c. If the government establishes a price floor (minimum price) of RM9.00, what quantity
will be demanded and supplied?
d. If supply increases to QS’ = 20 + 6P, what is the new equilibrium price and quantity?
e. If demand increases to QD’ = 250 – 19P and the supply is as given in part (d), what is the
equilibrium price and quantity?

5. It was estimated that 25 percent of the supply of bottled water in the market is nothing more
than ordinary tap water. Thus the government is considering to eliminate this type of bottled
water from the market. If the market demand is unaffected, what qualitative impact would this
labeling change have on equilibrium price and quantity for bottled water? Support your
answer with a graphical model.

6. Reconsider the implications of the revised labeling standards discussed in Question 5

in the context of the hypothetical market for bottled water modeled in the text. Recall
that the market demand and market supply equations are:

QD = –100P + 1150; QS = 400P – 100,

where PE = $2.50, and QE = 900.

Now, suppose the change in standards results in a new market supply of QS’ = 400P – 350,
with no change in market demand.

a. Determine the new PE’ and QE’ for bottled water. Do your results agree with your
intuitive answer to Question 5?
b. Graphically illustrate the market for bottled water before and after the change in
labeling standards. Be sure to label all relevant points.
c. Compare the values of consumer surplus and producer surplus before and after the
change in labeling standards. Is this result expected? Why or why not?