Chapter 1 practice questions

[Market equilibrium] Consider a perfectly competitive market for widgets. The

market diagram is illustrated as follows.
Price of a pizza ($)
Supply
7.50
5.00
2.50
Demand
O

40

20 24

56 60

(a) How many pizzas are demanded when the price of a pizza is $2.50?
(b) How many pizzas are supplied when the price of a pizza is $2.50?
(c) Is $2.50 an equilibrium price of a pizza? If so, why? If not, why not?
(d) How many pizzas are demanded when the price of a pizza is $5.00?
(e) How many pizzas are supplied when the price of a pizza is $5.00?
(f) Is $5.00 an equilibrium price of a pizza? If so, why? If not, why not?
(g) How many pizzas are demanded when the price of a pizza is $7.50?
(h) How many pizzas are supplied when the price of a pizza is $7.50?
(i) Is $7.50 an equilibrium price of a pizza? If so, why? If not, why not?

(P.T.O. for answer key)

1/2

pizzas
(thousand)

[ANSWER KEY]
(a) How many pizzas are demanded when the price of a pizza is $2.50? 56,000
(b) How many pizzas are supplied when the price of a pizza is $2.50? 20,000
(c) Is $2.50 an equilibrium price of a pizza? If so, why? If not, why not? No.
56,000 pizzas are demanded but only 20,000 are supplied (excess demand),
so the price wont stay the same; it will be negotiated upwards.
(d) How many pizzas are demanded when the price of a pizza is $5.00? 40,000
(e) How many pizzas are supplied when the price of a pizza is $5.00? 40,000
(f) Is $5.00 an equilibrium price of a pizza? If so, why? If not, why not? Yes.
When the price is $5.00, the quantity demanded equals the quantity
supplied at 40,000. Neither buyers nor sellers have an incentive to alter
the price, and so it is the equilibrium price.
(g) How many pizzas are demanded when the price of a pizza is $7.50? 24,000
(h) How many pizzas are supplied when the price of a pizza is $7.50? 60,000
(i) Is $7.50 an equilibrium price of a pizza? If so, why? If not, why not? No.
Only 24,000 pizzas are demanded but 60,000 are supplied (excess supply),
so the price wont stay the same; it will be pushed downwards.

Price of a pizza ($)

Supply
Excess supply

7.50
5.00
2.50

Excess demand
Demand

40

20 24

(End of document)
2/2

56

60

pizzas
(thousand)