Practical Application of the Market Concepts The table below shows the demand an

Question

Practical Application of the Market Concepts

The table below shows the demand and supply of coats in Cedarsville:
a) What is the equilibrium price of coats? Will a shortage or surplus of coats occur at this price?

b) At what price will the most coats be sold?

c) The mayor of Cedarsville, in order to help the poor by making coats cheaper, imposes a price ceiling of $40. How many coats will be bought and sold? Will a surplus or shortage of coats occur at this price?

d) The mayor of Cedarsville, in order to help protect the town’s coat industry, imposes a price floor of $80 instead. How many coats will be bought and sold? Will a shortage or surplus of coats occur?

Draw a graph of the market for coats in Cedarsville. Use the supply and demand data in the table above. Identify the equilibrium price, and the quantity of coats sold at that price. Be sure to label every line on your graph!

Explanation / Answer

1.At equilibrium quantity demanded=quantity supplied.At price $60 both are equal.Qd=Qs=70.There is no shortage/surplus at this price.

2.The most coats sold is at price $40.Number of coats sold is 90.

3.At price $40,quantity demanded=90 and quantity supplied=30.Since,Qd>Qs,there would be shortage=60 units.

4.At price 80,Qd=50 and Qs=110.Qs>Qd so there would be surplus.

Experts are supposed to answer only the first four questions.

Please leave a comment in case of a query.

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