1. Consider the world market for rice, which is characterized by the following s
ID: 1141389 • Letter: 1
Question
1. Consider the world market for rice, which is characterized by the following supply and demand curves:
Quantity Supplied - Qs = 1.773P - 470
Quantity Demanded - QD = 940 - 0.887P
>> (Where quantities are measured in Millions of metric tons and prices are measured in dollars)
a. Assuming that the world market for rice is perfectly competitive, what is the equilibrium price, P* for this market?
b. What is the equilibrium quantity, Q* for this market?
c. Suppose a price floor of $560 is constituted, compare Qs and QD. Is there a surplus or a shortage? SHOW YOUR WORK
d. Suppose a price floor of $460 is constituted, compare Qs and QD. Is there a surplus or a shortage? SHOW YOUR WORK
Explanation / Answer
a. Equilibrium is attained at the point where demand equals supply.
940 - 0.887P = 1.773P - 470
940 + 470 = 1.773P + 0.887P
1410 = 2.66 P
P = 530.07
b. Q = 1.773 x 530.07 - 470
Q = 469.82
c. P = 560. This price is more than equilibrium price and hence there will be surplus as supply is more than demand.
Qd = 940 - 0.887 x 560
Qd = 443.28
Qs = 1.773 x 560 - 470
Qs = 522.88
P = 460 This price is less than the equilibrium price and hence there will be a shortage as supply is less than demand.
Qd = 940 - 0.887 x 460
Qd = 531.98
Qs = 1.773 x 460 - 470
Qs = 345.58
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