7. KEY QUESTION Suppose the total demand for wheat and the total supply of wheat per month in the Winnipeg grain market are as follows:

Thousands Thousands Surplus (+)

of bushels Price per of bushels or demanded bushel supplied shortage (–)

85 $3.40 72 __________ 80 $3.70 73 __________ 75 $4.00 75 __________ 70 $4.30 77 __________ 65 $4.60 79 __________ 60 $4.90 81 __________

a. What is the equilibrium price? What is the equilibrium quantity? Fill in the surplus–

shortage column and use it to explain why your answers are correct.

b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q.

c. Why will $3.40 not be the equilibrium price in this market? Why not $4.90?

“Surpluses drive prices up; shortages drive them down.” Do you agree?

d. Now suppose that the government establishes a ceiling (legal maximum) price of, say, $3.70 for wheat. Explain carefully the effects of this ceiling price. Demonstrate your answer graphically. What might prompt government to establish a ceiling price?