E202Exam1.10 - Chapter 4 9. (8 pts) Graph the demand curve...

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Answer : The original equilibrium price and equilibrium quantity are P = $2.00 and Q = 45 million gallons per month. The new equilibrium price and equilibrium quantity are P’ = $3.00 and Q’ = 40 million gallons per month. Price rose by $1.00 and quantity fell by 5 million gallons per month. c. Suppose the federal government responds by imposing a price ceiling of $2.00 per gallon. What would be the quantity demanded of gasoline and the quantity supplied of gasoline? How large is the shortage (excess demand) of gasoline? Answer : At a price of $2.00, quantity demanded would be 45 million gallons per month but quantity supplied would be just 20 million gallons per month. There would be a shortage (excess demand) of 45-20 = 25 million gallons per month. d. What might be a consequence (downside) of the price ceiling? Answer : Some buyers will be dissatisfied: unable to find gasoline. Time will be wasted waiting in lines and searching for gas stations with gasoline available.
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Unformatted text preview: Chapter 4 9. (8 pts) Graph the demand curve for a cancer-fighting drug, without which lung cancer patients will die. What is the price elasticity of demand for such a drug? What, in general, determines the price elasticity of demand? Answer : The demand curve would be a vertical (or near vertical) line at the required dosage per month because patients would be willing to pay almost any price to save their lives. The price elasticity of demand for such a drug would be zero (or near zero) as demand is perfectly inelastic (or nearly perfectly inelastic). In general, the price elasticity of demand is determined by availability of substitutes, fraction of income, and adjustment time. 10. (6 pts) Graph the market for diamonds and the market for water to show how it is possible for the price of water to be much lower than the price of diamonds even though the demand for water is much greater than the demand for diamonds....
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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