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EC1301

Semester 1
Tutorial 2

Short Answer Questions

1. How important are prices in allocating resources in a market economy?
2. In the former Soviet Union, prices were set by a group of planners, and usually remained
unchanged for several years. If a price system like this were introduced in the Singapore
economy, what effect would it have on buyers, sellers, and market equilibrium?
3. Suppose that demand is given by the equation Q D = 500 50P, and QD is quantity demanded,
and P is the price of the good. Supply is described by the equation Q S = 50 + 25P, where Q S
is quantity supplied. What is the equilibrium price and quantity?

a)
b)
c)
d)

4. Graph each of the following changes and explain what would happen to equilibrium price
and quantity.
Demand increases and Supply increases
Demand increases and Supply decreases
Demand decreases and Supply decreases
Demand decreases and Supply increases
5. Comment on the following statement: A decrease in supply will lead to an increase in the
price which decreases demand, thus lowering price. Therefore, a decrease in supply has no
effect on the price of a good.
6. Given the products below and the events that affect them, indicate what happens to demand
and supply, and the equilibrium price and quantity in a competitive market. Identify the
determinant of demand or supply that causes the shift.
a) Digital cameras. There are improvements in the technology that increase the economic
efficiency of production.
b) Automobiles. Consumer incomes rise as the economy moves out of recession.
c) Beef. Chicken prices fall because of a decline in the cost of feeding chickens.
7. Both Economist Flores and Economist Jenkins have been monitoring the cucumber market
and have noted that the equilibrium price of cucumbers and quantity of cucumbers have
risen over the last year. Flores and Jenkins, however, disagree about why this change has
occurred. Flores holds that both supply and demand have increased and that the shift in
demand has been greater than the shift in supply. Jenkins, however, argues that while
demand has increased, supply has decreased and the shift in supply is greater than the shift
in demand. Which economist offers the most feasible theory of why the equilibrium price
and quantity of cucumbers have risen?
8. In Figure 2 (refer to the lecture slides on Working with Supply and Demand), a price
ceiling for maple syrup caused a shortage, which led to a black market price ($4) higher than
the initial equilibrium price ($3). Suppose that the price ceiling remains in place for years.

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Over time, some maple syrup firms go out of business. With fewer firms, the supply curve in
the figure shifts leftward by 10,000 bottles per month. After the shift in the supply curve:
a) What is the shortage caused by the $2 price ceiling? (Provide a numerical answer.)
b) If all the maple syrup is once again purchased for sale on the black market, will the
black market price be greater, less than, or the same as that in Figure 2? Explain briefly.
9. Using a supply-demand diagram, show a labor market with a binding minimum wage. Now,
use the diagram to show those who are helped by the minimum wage, and those who are
hurt by the minimum wage.
10. In Figure 5 (refer to the lecture slides on Working with Supply and Demand), explain why
the incidence of $0.60 tax imposed on sellers could not be split equally between buyers and
sellers, given the specific supply and demand curves as drawn. [Hint: What price would
gasoline sellers have to charge after the tax if there were an even split? What would happen
in the market if sellers charged this price?]