Department of Economics
Supply and Demand
1. The equations describing the domestic market for gopher wood in Ararat
P = 300 - Q Supply
P = 60 + 2Qh
Qd = Qs
Price, P is measured in price per cord of cut wood. Quantity, Q, is
the number of cords of wood cut per day. The superscript h denotes wood
supplied domestically. This will become important later in the problem
set. Check the radio buttons above to indicate which is the supply curve and
which is the demand curve.
2. Find the equilibrium price and quantity and enter your answers in the
3. The government wants to improve the standard of living for woodcutters
and the imposes a price floor of $240/cord. What quantity of wood will be
demanded with the price floor in place?
What quantity of wood will be
supplied? Are wood cutters able to
sell everything that they produce?
Woodcutters complain that they are being swamped by their unsold
inventory and so the price floor is repealed.
4. There is a technological breakthrough. Instead of gnawing down
the trees with their teeth the woodcutters are now able to harvest wood with
an axe. The consequence of the new technology is that woodcutters are
now able and willing to supply twice as much wood at any given price.
As a result of the technological breakthrough what are the new equilibrium
price and quantity?
After much wailing, rending of garments and pulling out of hair the
dentists of Ararat have convinced the government to ban the use of axes in
the harvesting of gopher wood so the original supply and demand curves
5. The government has decided that it needs to raise money to build a
road for the benefit of the community. Toward this end they levy a 10%
sales tax on gopher wood sales that is to be collected by woodcutters and
remitted to the government. With the imposition of the tax, what is
the new equilibrium quantity of gopher wood traded in the market place?
After the imposition of the tax
what is the total price per cord paid by consumers?
After they have remitted the
tax, what price do woodcutters receive per cord?
How much tax revenue is collected
by the government?
Once again there is much gnashing of teeth and the government repeals the
tax so the original domestic supply and demand curves prevail.
In a cruel twist the government accepts an industrial development
loan from the International Development and Liberalization Endowment (IDLE).
A stipulation in receiving the loan is that Ararat eliminate their trade
barriers and import foreign gopher wood into their market. The import
supply curve for gopher wood in Ararat is P = 80 + 4Qi .
The consequence of this is that the supply of gopher wood in Ararat now
comes from two sources: That produced domestically and that imported from
abroad. Consumers of gopher wood are not able to distiguish between
that which is produced domestically and that which is imported. Hint: To
solve the next questions you will need to know the quantity of wood supplied
from each source for a given price.
Once the gopher wood market is open to imports, what will be the
new equilibrium price and quantity of wood in Ararat?
What quantity of wood is produced domestically
and what quantity is imported?