Suppose the supply and demand curves for potatoes in Canada are given by: QS = -50 + 20P QD = 100 - 10P,
where QS and QD are the quantities in millions of bushels and P is the price per bushel.
(a) At what price would production fall to zero? At what price would consumption fall to zero? What is the maximum amount that would ever be consumed? Using these points, carefully graph the supply and demand curves.
(b) Calculate the equilibrium price and quantity. Identify these on your diagram.
(c) Suppose that, due to the entry of new producers, supply shifts to QS’= -60 + 30P. Has the price at
which there will be no production changed? Illustrate the new supply curve in your diagram.
(d) Explain why the price you calculated in part (b) is no longer the equilibrium price.
(e) Calculate the new equilibrium price and quantity and identify it on your diagram. Can you identify which of the following has been made better off or worse off: consumers, new producers, old producers? Brieflyexplain.
QS = -50 + 20P QD = 100 - 10P (a) The production will fall to zero, when QS = 0, so 20P = 50, P = $2.5? The consumption will fall to zero, when QD = 0, so 10P = 100, P = $10. The maximum amount that would ever be consumed will be at the point, where P = 0, so QD = 100 - 10*0 = 100 units. (b) The equilibrium price and quantity will be: Qe = Qd = Qs, -50 + 20P = 100 - 10P 30P = 150 Pe = $5 Qe = -50 + 20*5 = 50 units. (c) If QS’= -60 + 30P and QS' = 0, 30P = 60, P = $2. (d) The price we calculated in part (b) is no longer the equilibrium price, because the supply curve changed and moved to the right. (e) If QS’= -60 + 30P, in equilibrium QD = QS', so -60 + 30P = 100 - 10P 40P = 160 Pe = $4 Qe = -60 + 30*4 = 60 units. Consumers are better off, new producers are better off, old producers are worse off due to the increase of the supply and decrease of market price.