Temple University

Department of Economics

Economics 3501

Homework 1

Supply and Demand

Name KEY

1. The equations describing the domestic market for gopher wood in Ararat are

 P = 300 - Q  Supply   Demand

 P = 60 + 2Qh Supply   Demand

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 boxes below:

Price   220Quantity80

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? 60What quantity of wood will be supplied? 90Are wood cutters able to sell everything that they produce? Yes No

Woodcutters complain that they are being swamped by their unsold inventory and so the price floor is repealed.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?

Price 180Quantity 120

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 prevail again.

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? 73.125After the imposition of the tax what is the total price per cord paid by consumers? 226.875After they have remitted the tax, what price do woodcutters receive per cord? 206.25How much tax revenue is collected by the government? 1508.203

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?

Price 200Quantity  100

What quantity of wood is produced domestically 70and what quantity is imported?30