EC 201 Student Name:EC 201 Student Name: Cal Poly Pomona Class Meeting Time: Spring, 2007Dr. BresnockHomework Assignment 3 (25 points)1. Suppose the total demand for wheat and the total supply of wheat per month in theKansas City grain market are as follows:Thousands ofbushels demandedPrice perbushelThousands ofbushels suppliedSurplus (+) orshortage (-)85 $4.60 7280 4.80 7375 5.00 7570 5.20 7765 5.40 7960 5.60 81(a) What will be the market or equilibrium price? What is the equilibrium quantity?Using the surplus-shortage column, explain why your answers are correct.(b) Using the above data, graph the demand for wheat and the supply of wheat. Besure to label the axes of your graph correctly. Label equilibrium price “PE”and equilibrium quantity “QE”.(c) Why will $4.60 not be the equilibrium price in the market? Why not $5.60? “Surpluses drive prices up; shortages drive them down.” Do you agree?(d) Now suppose that the government establishes a ceiling price of, say, $4.80 forwheat. Explain carefully the effects of this ceiling price. Demonstrate youranswer graphically (use the graph in part (b)). What might promptgovernment to establish a ceiling price?(e) Assume now that the government establishes a price floor of, say, $5.40 for wheat.Explain carefully the effects of this price floor. Demonstrate your answergraphically (use the graph in part (b)). What might prompt government toestablish this price floor?(f) “Legally fixed prices strip the price mechanism of its rationing function.” Explainthis statement in terms of your answers to 1D and 1E.2. Other thing being equal, what effect will each of then following have upon the demand,quantity demanded, supply, quantity supplied, equilibrium quantity, and equilibriumprice of, product B? Draw simple graphs to as part of your explanation and clearlylabel the axes and functions.(a) The price of product C, a substitute for B, goes down.(b) Consumers anticipate declining prices and falling income.2(c) An increase in the prices of resources required in the production of B.(d) The levying of a special sales tax upon B.3(e) Demand for B decreases and supply for B decreases.
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