Download Problem 2: Demand and supply schedules for apples in wholesale

EWU – ECON 200 - Introduction to Microeconomics - Briand
In-Class Exercises. Supply and Demand Model
Student Name: ____________________
Problem 1. (Source: Robert H. Hall and Marc Lieberman. Microeconomics Principles and Applications. 2001.
Western College Publishing.)
In the late 1980s, many East Coast colleges purchased expensive equipment that would enable them to switch
rapidly from oil to natural gas as a source of heat. The idea was to protect the colleges from a sudden rise in oil
prices, like the one they had suffered in the 1970s.
Finally, an event occurred that gave the colleges a chance to put their new equipment to use: In the Fall of 1990,
Iraq invaded Kuwait. As oil prices skyrocketed. The colleges switched from burning oil to burning natural gas.
The college administrators expected big savings on their energy bills. But they were in for a shock. When they
received the bills from their local utilities, they found that the price of natural gas – like the price of oil – had
risen sharply. As a result, they did not save much at all. Many of these administrators were angry at the utility
companies and accused them of price gouging. Iraq’s invasion of Kuwait, they reasoned, had not affected
natural gas supplies at all, so there was no reason for the price of natural gas to rise.
Were the college administrators right? Was this just an example of price gouging by the utility companies who
were taking advantage of an international crisis to increase their profits?
HINTS: Use a supply and demand analysis to answer the following questions:
(a) Why did Iraq’s invasion of Kuwait cause the price of oil to rise?
(b) Why did the price of natural gas rise as well?
Problem 2: Demand and supply schedules for apples in wholesale market
Price per Pound
Quantity Demanded
Quantity Supplied
(cents)
(millions of Pounds)
(millions of Pounds)
45
70
55
50
60
60
55
50
65
60
40
70
65
30
75
(a) Use the data of Table 1 to draw the demand and the supply curves for apples in the space below. Make sure
to label the axes and the curves.
(c) What are the equilibrium price and the equilibrium quantity of apples?
(c) If the current price of apples is 60 cents per pound, will there be a shortage or a surplus of apples? How
much of a shortage or surplus is there, and what do you expect to happen to the price of apples?
(d) Show on your graph the impact of an increase in the price of oranges on the apples market.