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markets5a

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Unformatted text preview: Additional Problem #5 : Market Analysis (Answer Key) 1. Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as follows: Thousands of bushels demanded Price per bushel Thousands of bushels supplied Surplus (+) or shortage (-) 85 \$4.60 72 -13 80 4.80 73 -7 75 5.00 75 0 70 5.20 77 7 65 5.40 79 14 60 5.60 81 21 (a) What will be the market or equilibrium price? What is the market or equilibrium quantity? Using the surplus-shortage column, explain why your answers are correct. P E = \$5.00 Q E = Q D = Q S = 75 At prices below \$5.00 Q D > Q S Î Shortage At prices above \$5.00 Q S > Q D Î Surplus (b) Using the above data, graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price “P E ” and equilibrium quantity “Q E ”. P S Î Surplus (c) P Floor = \$5.40 P E = \$5.00 Î Shortage (d) P Ceiling = \$4.80 D 0 Q E = 75 Q (c) Why will \$4.60 not be the equilibrium price in the market? Why not \$5.60? “Surpluses drive prices up; shortages drive them down.” Do you agree? At P = \$4.60 Q D > Q S Î P increases P = \$5.60 Q S > Q D Î P decreases Surpluses drive prices down, shortages drive prices up....
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