Table 1 Price (dollar per carton) Quantity demanded Quantity Supplied (Cartons p
ID: 1131819 • Letter: T
Question
Table 1
Price (dollar per carton)
Quantity demanded
Quantity Supplied
(Cartons per day)
1.00
200
110
1.25
175
130
1.50
150
150
1.75
125
170
2.00
100
190
What is the equilibrium price and equilibrium quantity of milk? (5Marks)
Describe the situation in the milk market if the price were $1.75 a carton and explain how the market reaches equilibrium. (5Marks)
A drought decreases the quantity supplied by 45 cartons a day at each price. What is the new equilibrium and how does the market adjust to it? (5Marks)
If milk becomes more popular and better feeds increase milk production, describe how the equilibrium price and quantity of milk will change. (5Marks)
[Total 20 Marks]
Table 1
Price (dollar per carton)
Quantity demanded
Quantity Supplied
(Cartons per day)
1.00
200
110
1.25
175
130
1.50
150
150
1.75
125
170
2.00
100
190
Explanation / Answer
The price at which aggregate demand and aggregate supply are equal is called as 'Equilibrium price' . So here it is$1.5. At what level both aggregate demand and supply are equal that level or quantity is called as 'Equilibrium quantity'. so it is 150 cartons. When the price increases to$1.75 then demand decreases ( this is general rule but in case of necessary goods it may remain same). Now suppliers tend to reduce price to sell there products , so again demand comes to it's original position and market attains equilibrium . This Adam Smith calls as 'invisible hand'. When supply reduces by 45cartons , then it affects both equilibrium quantity and price i.e equilibrium price increases and equilibrium quantity reduces. New equilibrium quantity will be 105cartons(150-45). When milk gets popular it's demand increases and if the production also increases then equilibrium quantity increases but equilibrium price remains same.
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