Sunday 10 July 2011

Solutions for Topic 3 Lecture - Market Equilibruim

3.1 The correct answer is (C).
When supply shifts right along a given demand curve, the equilibrium price will fall and quantity will increase.
An improvement in technology shifts the supply curve to the right while demand of handphones remains unchanged.

3.2  The correct answer is (A).
When demand shifts right along a given supply curve, the equilibrium price and quantity will both increase. So demand for DVD has increased while supply of DVD remains unchanged.
3.3  The correct answer is (D). 
Producer surplus is the difference between the price producer receives from the market and the price he is willing to sell, which is the marginal cost and shown in the supply curve
 3.4  Fear of bird flu reduces demand for egg Þ Demand curve shifts left
Ban of egg import reduces supply of egg Þ Supply curve shifts left
The net effect is a lower quantity but price may be higher, lower or remain unchanged. (It depends on the relative strenght of the shift in Demand and the shift in Supply)
 3.5  The statement is true.
Under the market system, the equilibrium price and quantity will occur.  This will maximize the social welfare, measured by the sum of producer surplus and consumer surplus.
Any other outcome will lead to over-production or under-production which creates deadweight loss.
Ensure that you draw the Demand and Supply curves, label the diagram clearly and shade in the Consumer surplus (between the Demand curve and price) and Producer Surplus (between Price and the Supply curve) in different colours.
3.6
i) A decrease in the number of sellers decreases the supply. Hence the decrease in the number of companies selling computer software decreases the supply of computer software and shifts the supply curve of computer software leftward. Equilibrium price will increase and quantity will decrease.   
ii.An increase in the price of steel is an increase in the price of a resource used to make the good. As a result, the supply of bicycles decreases and the supply curve shifts leftward. There is no change to the demand, so the demand curve does not shift. The equilibrium price of a bicycle rises and the equilibrium quantity decreases.
iii.Natural gas and heating oil are complement goods. When the price of natural gas increases, the demand for heating oil will increase. So in the market for heating oil, demand curve shift to the right, resulting in higher equilibrium price and quantity. 

3 comments:

  1. other than lecture 3 answer..is it possible to post the lecture 2 answers and lecture 1 answers on the blog....thank you


    Pin Wen
    32nd intake class D

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  2. For 3.6 (iii) i am confusing that heating oil and natural are substitution or complement goods.

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