Review Question for chapter3 (Due Monday, Feb 4 5pm)1) Using supply-and-demand diagrams, show and explain the effects of the following events on the price of CD-Rs and the quantity of CD-Rs sold. For each event, identify which of the determinants of demand or supply is affected, how it influences demand or supply, and what happens to the equilibrium price and quantity.a) Free peer-to-peer music exchange through the Internet becomes legal The figure above shows the effect of making free peer-to-peer downloading of music legal. Making free peer-to-peer music downloading legal leads to more downloads and more people copying music files to CDs. Therefore, the demand for CD-Rs increases and the demand curve shifts rightward. As a result, the equilibrium price rises, from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.b) A material that is used to produce CD-Rs becomes cheaper.The figure above shows the effect of change in the price of factors of production of CD-Rs. The lower cost increases the supply of CD-Rs, shifting the supply curve rightward. As a result, the equilibrium price falls from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.c) a and b work at the same time.The equilibrium quantity would increase and the change in equilibrium price is uncertain. The increase in demand would increase price, while the increase in supply would decrease price.Price(dollars perpizza)Quantity demanded(pizzas per week)Quantity supplied(pizzas per week) 5 750 300 6 700 400 7 650 500 8 600 600 9 550 70010 500 80011 450 90012 400 1,0003) A market research team has come up with the demand and supply schedules for pizza in College Station. These schedules are given in the table above. Use these data to analyze the situation in the market for pizza.b) Following part (a) we did in the class, suppose the price is $6. Describe the situation in the market and explain how the price of pizza adjusts.If the price is $6, there is a shortage of 300 pizzas. The shortage leads to a rise in the price. The higher price decreases the quantity demanded and increases the quantity supplied bringing the market to equilibrium at $8.c) A new pizza producer has entered the market and increases pizza production by one thirds. Use your graph to show the predicted effects on the market for pizza. What are the predicted equilibrium price and quantity? How will the market adjust?Supply curve would shift rightward. The predicted equilibrium price is about $7, and the equilibrium quantity is about 650 pizzas per week. The increase in supply means the supply curve shifts rightward. When the supply curve shifts, at the old price, $8, there is a surplus of pizzas and therefore the price drops bringing the market to equilibrium at
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