Supply and Demand and New Equilibrium Price

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Answers to End-of-Chapter Questions in Chapter 3

1. Assume that the (weekly) market demand and supply of tomatoes are given by the following figures:

|Price (£ per kilo) |4.00 |3.50 |3.00 |2.50 |2.00 |1.50 |1.00 |
|Qd (000 kilos) |30 |35 |40 |45 |50 |55 |60 |
|Qs (000 kilos) |80 |68 |62 |55 |50 |45 |38 |

(a) What are the equilibrium price and quantity? (b) What will be the effect of the government fixing a minimum price of (i) £3.00 per kilo; (ii) £1.50 per kilo? (c) Suppose that the government paid tomato producers a subsidy of £1.00 per kilo. (i) Give the new
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Some universities in the UK have been considering charging tuition fees because of the perceived shortage of state funding. (ii) Health care from general practitioners People may have to wait to see their doctor. Rationing takes place though this process of waiting: either people have to wait in the doctor’s surgery or are not given an immediate appointment. Because people have to wait, this reduces the number of people seeing their doctor, either because they are better by the time that their appointment is due, or because they would rather suffer the symptoms than have to wait. The shortage could alternatively be dealt with by increasing the number of doctors (in which case the benefits from more immediate treatment would have to weighed against the extra cost to the taxpayer), or by charging for people to visit their doctor. This latter solution, however, would be hard for poor people, and might discourage people from getting treatment (which in turn could lead to the spread of infectious diseases).

3. If the government increases the tax on wine by 10p, what will determine the amount by which the price of wine will go up as a result of this tax increase? The price elasticity of demand for and supply of wine. The more elastic the demand and the less elastic the supply, the less will price rise: i.e. the more of the tax that must be absorbed by the producers/suppliers (see Figure 3.5 in the text).


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