Consider the market for gasoline in Calgary. Units of quantity and price are in thousands of litres
and $/litre, respectively. Letting ???? denote the price, suppose the quantity demanded of gasoline,
denoted as ????!, is given by the following equation:
????! = 1950 − 500????
Suppose that we know the following about the supply of gasoline:
• The supply equation is linear.
• When the price is $0.25/litre, 700 thousand litres of gasoline is supplied to Calgary.
• Market research shows that indicates that a price increase of $0.25/litre would result in
an increase in 100 thousand litres.
a) Use the information provided to find the supply function, i.e., determine ???? and ???? in the
equation ????" = ???? + ???????? where ????" and ???? are the quantity supplied and price, respectively.
b) Plot the demand and supply curve with quantity on x-axis and price on y-axis. Clearly
identify the numerical values of any intercepts on any axes.
c) Find the equilibrium price and quantity. Add these values to the plot in part b).
Suppose there is a snowstorm near Calgary that results in 450 thousand litres of gasoline that
would have otherwise been brought to Calgary at every price level no longer being available.
d) How does this shift each curve, if at all? Determine the new equation(s).
e) Redraw the plot from part b) with the new equation(s). Determine the equilibrium price and
quantity after the disruption.
f) Indicate how the equilibrium prices and quantities from part e) compare to those from part
b). Explain why the changes are economically reasonable or not