The role of markets in allocating resources — practice questions

Step 1 — Demand shift: Health report → demand shifts right → P↑, Q↑.

Step 2 — Supply shift: Good harvest → supply shifts right → P↓, Q↑.

Step 3 — Combined effect on Q: Both shifts raise quantity → Q definitely increases.

Step 4 — Combined effect on P: Demand raises P; supply lowers P → P is ambiguous — depends on relative shift magnitudes.

If demand shift is larger → net P rises. If supply shift is larger → net P falls.

Diagram: Draw D₁→D₂ (right) and S₁→S₂ (right). Mark E₁ and E₂. Label Q₂ > Q₁ clearly.

Part a) Equilibrium Calculation

Step 1: Set quantity demanded equal to quantity supplied (Qd = Qs) to find the equilibrium price (Pe). 800 - 50P = 200 + 50P

Step 2: Solve for P. 800 - 200 = 50P + 50P 600 = 100P P = 600 / 100 **Pe = $6**$

Step 3: Substitute the equilibrium price back into either the demand or supply equation to find the equilibrium quantity (Qe). Using the demand equation: Qe = 800 - 50(6) = 800 - 300 = 500 units. Using the supply equation: Qe = 200 + 50(6) = 200 + 300 = 500 units. The equilibrium price is $6 and the equilibrium quantity is 500 widgets.

Part b) Price Ceiling and Shortage Calculation

Step 1: Identify the price ceiling. The government sets a maximum price of $5. This is below the equilibrium price of $6, so it will be binding and cause a shortage.

**Step 2: Calculate the quantity demanded (Qd) at the price ceiling of $5.**$ Qd = 800 - 50(5) = 800 - 250 = 550 units.

**Step 3: Calculate the quantity supplied (Qs) at the price ceiling of $5.**$ Qs = 200 + 50(5) = 200 + 250 = 450 units.

Step 4: Calculate the shortage (excess demand). Shortage = Quantity Demanded - Quantity Supplied Shortage = 550 - 450 = 100 units.

At a maximum price of $5, there will be an excess demand (shortage) of 100 widgets.