QUESTION ONE

Use a supply and demand diagram for a specified competitive market to demonstrate the effect of the

specific shocks given in the cases below on the equilibrium price and quantity. Clearly explain the key

adjustments in demand and supply curves that result. Show whether there is a shift in the demand

curve, the supply curve, or neither.

a) An abrupt heat wave smashes the city of Lusaka. Show the effect in the ice cream market in

Lusaka. [5 Marks]

b) Authorities impose a tax on ice cream to be paid by producers. How does this affect the ice

cream market? [5 Marks]

c) We are told that Kenya and Madagascar are major producers of cotton. Madagascar workers

decide to go on strike. Show the effect on the market for Madagascar cotton. [5 Marks]

d) Illustrate the effect of the situation described in part c) on the market for Kenya cotton.

[5 Marks]

e) In a command economy, the authorities impose a price cap on canned Fanta. Show the effect in

the canned Fanta market. [5 Marks]