Question #2: Demand and Supply for Pizza (21 points) Consider a perfectly competitive market for piz Show more Question #2: Demand and Supply for Pizza (21 points) Consider a perfectly competitive market for pizza. The demand and supply for this market are given by the equations below. The quantity is measured in boxes of pizza. Demand: Q = 600 25P Supply: Q = 25P 100 2.1 Solve for the market equilibrium price and quantity. Please show your work to receive credit. [2 points] 2.2 Using the figure below illustrate the demand and supply curves for this market. Clearly label the axes (using symbols and words in the blank boxes below) demand (D1) and supply (S1) curves and the market equilibrium values (P1* Q1*) you found in 2.1. Take care to make sure that your lines correctly reflect the information given in 2.1 Label the equilibrium Point A on the diagram. [3 points] 2.3 Suppose the price in this market were $8. (i) Does this lead to excess demand excess supply or neither? (ii) Does this create a surplus shortage or neither? (iii) Compute the size of the surplus/shortage in the market at this price or show that no such shortage/surplus exists. Please show your work to receive credit. [3 points] 2.4 Now suppose the market is currently at the equilibrium Point A you found in #2.1-2.2. Then the market experiences a decrease in the price of mozzarella cheese used to make pizza. How will this affect the demand OR supply of pizza? Explain briefly why this is the case. [2 points] 2.5 Illustrate the change from the preceding question with a new demand and/or supply curve on your graph from #2.2. Clearly label the any new curves and equilibrium values. Label the new equilibrium Point B. [2 points] 2.6 Suppose there is an increase in income. (i) How will this affect the demand and quantity demanded for pizza? (ii) Explain citing any assumptions you are making about consumer behavior. Define any terms that you use. DO NOT ILLUSTATE THIS CHANGE ON YOUR DIAGRAM FROM #2.2. [2 points] 2.7 Suppose that the changes described in #2.4-2.6 happen at the same time. Using the space below illustrate how these two changes would affect the market. How does the equilibrium price change? How does the equilibrium quantity change? Use your diagram (you may illustrate more than one) to support your answer and clearly state any assumptions you are making in your diagram and explanation. [4 points] 2.8 If you had data on equilibrium prices and quantities for pizza how could you use this information to determine which factor is relatively more important? Cite your answers above to support your answer to this question. [3 points] Show less
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