Activities and Definitions

Qs = 1800 + 240P Qd = 3550 - 266P

◦ Price is in dollars per bushel◦ Quantity is in millions of bushels per year

Find the equilibrium price and quantity Price Elasticities of Demand and Supply

◦ EDp = (ΔQD%)/(ΔP%) = (P/Q)(ΔQD/ΔP)

◦ Esp = (ΔQS%)/(ΔP%) = (P/Q)(ΔQS/ΔP)

◦ Calculate these elasticities Calculate Consumer and Producer Surplus

Qs = 1800 + 240P Qd = 3550 - 266P Suppose a tax of $0.50 per bushel is levied

on wheat produced by farmers in the U.S.◦ Find the new price and quantity◦ Calculate the tax revenue and Economic Surplus

Suppose a price floor of $5.00 per bushel is imposed on the wheat market (w/o the tax)◦ Find the quantities supplied and demanded, the

surplus quantity (if any), and Economic Surplus under the price floor

QS = 15.90 + 0.72PG + 0.05PO QD = 0.02 – 1.8PG + 0.69PO

◦ Q is in Tcf, PG in $/mcf, and PO = $50/barrel

◦ Verify that PG = $6.40, Q = 23Tcf in equilibrium Suppose a price ceiling of $3.00/mcf is

imposed◦ Calculate the quantities supplied and demanded at

the ceiling price◦ Is there a surpus? A shortage?◦ Calculate Economic Surplus before and after the

ceiling

Natural Gas Market◦ QS = 15.90 + 0.72PG + 0.05PO

◦ QD = 0.02 – 1.8PG + 0.69PO

◦ Equilibrium PG = $6.40, Q = 23 Tcf; PO = $50 Suppose the price of oil increases to $80

per barrel◦ Find the new equilibrium price and quantity

World Crude Oil Market QS = 32 + 0.04P QD = 35.3 – 0.03P

◦ P is in $/barrel and Q is in billions of barrels (bb)◦ Verify P = $47.14 in equilibrium and Q = 33.89

Suppose OPEC reduces its supply of crude oil by 3 bb/year◦ Find the new equilibrium price and quantity