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ECON 201 –003, Assignment #2

Supply and Demand

Due Date: Tuesday, January 29, 2013 @ 13.00

1

Question 1: Market for lobster (15 points)

The annual demand and supply for Atlantic lobster is given by the following
equations:

100 0.2
D

P Q= − , and 25 0.1
S

P Q= + , where P is the price per Kg in dollars, Q
D

and

Q
S
are respectively the quantity demanded and the quantity supplied (in thousand

of Kgs).
1. Construct the Demand and Supply curves to scale. Show all the work, and

intercepts and make sure that all axis and curves are labelled properly (10
points).

2. Let P* and Q* be the equilibrium price and quantity for lobster. Calculate
P* and Q* and show them in the graph. Provide all theoretical justifications
for your calculations (5 points).

Question 2: Market for Handmade Acoustic Guitars (20 points)

After several years of decline the market for handmade acoustic guitars is making a
comeback. These guitars are usually made in small workshops employing relatively
few highly skilled workers. Using the Supply and Demand model fully explain the
change in the market in each of the following cases. Illustrate your answers with
simple graphs by indicating the demand and/or supply changes and the resulting
equilibrium price and quantity and their direction of change.

1. Music using handmade acoustic guitar makes a comeback as audiences tire
of heavy metal and grunge music

2. A foreign producer reengineers the guitar making process and floods the
market with guitars

3. Canada goes in deep recession in which the income of the average
Canadians falls sharply

4. Environmentalists succeed in having the use of Brazilian rosewood banned
in Canada, forcing producers to seek out alternative, more costly woods

Question 3: Movement along or shift? (Each question is 5 marks for a total
of 25 marks)

For each of the following statement determine whether there has been a change in
the supply/demand or change in quantity supplied/demanded. Identify the market
and the side of the market these changes have occurred. Explain your answer fully
and illustrate with a simple graph.

1. The price of Canadian grown peaches skyrockets during an unusually cold
summer that reduced the size of the peach harvest.

ECON 201 –003, Assignment #2
Supply and Demand

Due Date: Tuesday, January 29, 2013 @ 13.00

2

2. A medical study reports that eating chicken reduces the likelihood of
suffering from particular types of heart problems, and sales of chicken rises.

3. An increase in income leads to an increase price of beef and also to an
increase in beef sales.

4. Technological improvements in the microchip lead to price reduction for
personal computers and an increase for computer sales.

5. Sales of pork meat reduced drastically when cases a of H1N1 flu (a.k.a as
“swine” flu) peaked in early Fall 2009.

Question 4: Market for Chocolate (20 marks)

The New York Times recently stated:

While the world’s appetite for chocolate grows more voracious each year,
cocoa farmers around the globe are failing, under siege from fungal and viral
disease and insects….. Researchers predict a shortfall in beans from the cocoa
tree, the raw material from which the chocolate is made, in as little as five to
ten years.

1. Describe in terms of supply and demand mechanism what is described in

the quote.
2. What is the implied prediction for the equilibrium price of chocolate?
3. What is the implied prediction for the equilibrium quantity of chocolate,

considering that the effect on supply is much more significant than the
effect on demand?

Fully explain and illustrate all your answers with a simple graph of S and D.

Question 5: Market for Illegal Drugs (20 points)

Few years ago the Canadian government proposed a new legislation on drug
control. According to the proposal, much harsher penalties would be imposed on
marijuana production, while the possession of small amounts of the drug would no
longer constitute a criminal offence. It was understood that the more severe
penalties would have a stronger effect than the decriminalization of the possession
of small amounts. Show the effects of such legislation on the market for marijuana
by fully explaining the shifts in Demand and Supply curves if this legislation came
into force; the resulting new equilibrium price and quantity and their direction of
change. Illustrate your answers graphically in a simple D&S model.

Hint: Consider a simultaneous shift on both the demand and supply curves.