- The following relations describe demand and supply.

Q = 700 – 100P (1)

Q = -100 + 100P (2)

Where P is price in dollar and Q is quantity in unit.

a. Which equation (1) or (2), is demand equation and why? Answer the same for supply equation. And then find equilibrium (market clearing) P and Q algebraically and show them on graph. Free hand will do as long as you identify clearly market clearing P and Q on it.

1 is the demand equation as P and Q are inversely related

2 is supply curve as P and Q are positively related.

b. What would be the quantity demanded and the quantity supplied when P = $2 instead of market clearing P and Q in (a).

c. What would happen to price in (b) (i.e., rise or fall) in view of the market clearing price you obtained in (a) and why?

d. Suppose this is prescription drug that a terminally ill patient needs. If the patient can pay only $2 per pill, not the market clearing price, what would be the down side of free market system in this situation?

e. What would be the quantity demanded and the quantity supplied when P = $6?

f. What would happen to price in (e) (i.e., rise or fall) in view of the market clearing price you obtained in (a) and why?

g. If the product in question is wheat, what would happen to the farmer who can barely eke out living only at P = $6 after covering cost?

h. At what price would quantity demanded be zero and at what price would quantity supplied be zero?

i. What does the spread between the two prices (the price where quantity demanded is zero and the price where quantity supplied is zero) imply in this market?

j. Calculate the price when quantity demanded is 100 units and also the price when quantity supplied is 100 units.

k. Plot the price for 100 units buyers are willing to pay and the price for 100 units sellers are willing sell on the same diagram in (a). Would the quantity of 100 units be sold given the market clearing P and Q you got in (a)? The fact that quantity 100 exceeds market clearing Q is not the answer.

Provide numerical support for your answer. How about 200 units? Would 200 units be sold? Provide the numerical support for your answer. What is the difference in your numerical supports for the case of 100 units and 200 units?

l. It was reported that someone paid more than $1,000 for a grilled cheese looking like Virgin Mary on eBay. Explain why eBay emerged using the same rationale you used in your answer in (k). Ability to get the best deal is not the answer since it could happen at any yard sales on weekend.

m. Using the price you got in (j) for the quantity demanded of 100, calculate the quantity supplied at that price. Using the price you got for the quantity supplied of 100 in (j), calculate the quantity demanded at that price this time. Explain why the quantity you obtained above would not be sold given the market clearing price and quantity you obtained in (a). Provide numerical support for your answer.

n. Would there be a “buyer’s remorse” at Q = 100? How about at Q = 500? Provide numerical support as in (k) and (m).

o. Explain why the market clearing price and quantity obtained in (a) is Pareto efficient whereas your answers in (k) and (m) are Pareto inefficient. Explain Pareto’s inefficiency means using numbers if you can.

p. Economists often use Pareto’s optimality in explaining the efficiency of market economy. What would be the objection other social scientists to the economists use market efficiency as a measure of improvement in welfare of a society? Give a specific example. Hint: consider your answer in (d).

q. Suppose the demand for the product in question increases, which leads to a new demand equation given below:

Find the new market clearing price and quantity using new demand equation given above and the old supply equation. Show the result in a graph along with the market clearing price and quantity you obtained in question (a).

r. Compare the new market clearing price and quantity to the one in (a) and discuss how does market eliminate the resulting disequilibrium (surplus or shortage). Also explain how sellers (or producers) would make a short run adjustment in quantity so that the new market clearing is achieved.

s. Below is the new (increased) supply equation. Find new market clearing price and quantity using the new supply equation above and the new demand equation in (q).

Compare the new market clearing price and quantity above to that in (q) and discuss disequilibrium adjustment process in terms of long run adjustment by sellers (or producers).

Price is lower and quantity is higher.

t. Discuss the difference in the role of price in taking care of shortage/surplus in short run in (r) v. scarcity/abundance in long run in (s).

u. Consider the movements of market clearing price from (a) to (q) and then to (s). What implication(s) can you draw from the above price movements about the efficiency of market economy described? Hint: consider the short run adjustment in (r) and long run adjustment in (s).

v. Briefly explain how did Wal-Mart create a shift in demand as in (q) by building its first Wal-Mart in a small town, Bentonville, AR, and then engineered shift in supply in (s), which made Wal-Mart the world largest retailer. Explain very clearly about the reasons for an upward shift in demand curves and a shift to the right in supply curves (i.e. an increase in supply).

w. Please return to the original supply and demand equation at the beginning. Because of entry of foreign suppliers into the market (i.e., an increase in number of suppliers in an open economy), now supply curve shifted to:

x. Who benefits and who loses as a result of this open economy in this country focusing on this economy and ignoring foreign countries. Is there any net gain as a result of open economy in this country and why?

y. Explain how the impact of outsourcing covered in (w) is Pareto’s efficient in spite of negative impact of outsourcing has on domestic suppliers above?

z. Suppose the original demand and supply equation at the beginning describe hypothetical demand and supply equations of market for human organ (kidney). Because of moral implication of such a human organ market, supply is limited in our society by voluntary donation, which will be 100 kidneys in this case. This is the same number used in (k) earlier in the test. What would be the benefits lost for kidney patients relying upon donated kidneys, which creates perennial problem of kidneys shortage ignoring negative moral implication behind such a market for human organ. Use some numbers or graph in your answer. Hint: Pareto’s inefficiency.

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