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Question 1


In each of the following questions assume that the market is in equilibrium at X. Identify the new equilibrium following the changes given below:

Equilibrium test
  1. The market is for private education, and it receives a subsidy from the state because it is perceived to be a merit good.

  2. The market is for new housing, and building costs fall following a general fall in oil prices.

  3. The market is for cigarettes, and the government increases indirect taxes and at the same time smoking become less fashionable for people over 30.

  4. The market is for motor insurance, and the price of cars falls and at the same time the government subsidises private motor insurance.

  5. The market is for electronic goods which often employs very low paid assembly workers. The minimum wage rises and interest rates rise which affects consumer confidence.

  6. The market is for student textbooks following a fall in the costs of printing and a considerable increase in the numbers of students going to university.

  7. The market is for coffee beans following a frost in Brazil, a large producer, and a rise in the price of tea, considered to be a substitute.

Question 2

Sunny (UK) Ltd has produced a new DVD player for the UK market. The following demand and supply data is the result of recent market research.

Demand and supply data for Sunny UK Ltd.
200 100 220
180 120 200
160 140 180
140 160 160
120 180 140
100 200 120
80 220 100

  1. Plot demand and supply curves (1 mark)

  2. What is the equilibrium price and quantity? (2)

  3. What would be the effect of Sunny charging £80? (2)

  4. What would be the effect of charging £180? (2)

  5. What is the likely effect of introducing new technology which increases supply at each price by 40,000 units? (3)  

Question 3

The following data relates to the market for jars of coffee in the UK.

Demand and supply data for coffee.
5.00 60 150
4.50 65 140
4.00 70 130
3.50 75 120
3.00 80 100
2.50 85 190
2.00 90 90
1.50 95 80
1.00 100 70
  1. On graph paper plot the D and S Curves, and mark on current market equilibrium price and quantity. (Make sure the diagram scales are correct and large enough to work with).

  2. Explain and show what would happen if the jars were priced at £3 each.

  3. Explain and show what would happen if the jars were priced at £1.50 each.

  4. Explain the likely effects of a rise in the price of tea, which increases demand for coffee by 15m jars at each and every price.

  5. Sixth months later there is a very bad frost in Brazil which reduces the amount of coffee beans available, and this reduces the number of jars that can be produced by 20m jars at each and every price. Explain the likely effects of this frost in Brazil on the price of jars of coffee in the UK.
  6. Assume the original demand and supply -  show the likely effects of a tax on coffee of £2 per jar.