Question
1.The demand for strawberries in a local farmers market is given by P = 28 - 0.25 Q where P = the price of the
1.The demand for strawberries in a local farmers market is given by P = 28 - 0.25Q where P = the price of the strawberries (in dollars per pound) and Q = the quantity demanded (in pounds per day). The supply is given by P = 1 + 0.05Q where P = the price of the strawberries (in dollars per pound) and Q = the quantity supplied (in pounds per day).
a.Find the equilibrium quantity & equilibrium price in this market. Show your work. (1)
b.Find the consumer surplus, the producer surplus, & the social surplus in equilibrium in this market. Show your work. (1)
c.Suppose government decides that the market equilibrium price is too high and introduces the price ceiling by making it illegal to sell strawberries for more than $4.00 per pound. Everybody complies with the new regulation.
i.Find the consumer surplus, the producer surplus, & the social surplus in this market with the price ceiling. Show your work. (1)
ii.Find the deadweight loss in this market with the price ceiling. Show your work. (1)
2.Raspberries are a substitute good for strawberries. Suppose the weather conditions this year negatively affect the farmers' ability to grow raspberries (i.e., the cost of producing the raspberries increases).
a.Show graphically what happens in the market for raspberries (which curve(s) shift and what happens to the equilibrium price and quantity of raspberries). (1)
b.Given the changes in part (a) above, show graphically what happens in the market for strawberries (which curve(s) shift and what happens to the equilibrium price and quantity of strawberries). Explain in short. (2)
3.The USA and Canada can each produce strawberries and salmonberries as shown in the following table, measured in millions of tons per year.
USA
Canada
strawberries
salmonberries
strawberries
salmonberries
12
0
6
0
3
3
3
3
0
4
0
6
a.Which country has the comparative advantage in producing salmonberries? Which one has the comparative advantage in producing strawberries? Explain. (1)
b.Suppose that each country is currently producing 3 million tons of salmonberries and 3 million tons of strawberries. Show that both can be better off if they specialize in producing one good and then engage in trade. (2)
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