1. The following table gives a hypothetical demand schedule for bottled water (1 gallon containers) in the

United States:

Now suppose that the equation for the supply of bottled water in this market is given by the following equation:

P = 1 .0 + Q _S

Where P is the market price and Q _S is the quantity supplied of bottled water per period of time.

1. Complete all of the remaining columns in the table above showing the market for bottled water and the tendency of prices to move toward equilibrium.’
2. In this market for bottled water, if competitive market forces are allowed to work freely (that is, no government or other external forces interfere with the competitive market forces), what price and quantity will be established in the market?
3. What is the range of prices over which excess demand (or a market shortage) would exist in this market?
4. What is the range of prices over which excess supply (or a market surplus) would exist in this market?
5. Now suppose that the government sets a price limit on bottled water. Prices for a gallon container will not be allowed to exceed $1.00 each.

1. Would this policy be considered a price ceiling or a price floor?
2. Will this price control policy impose excess supply or excess demand on the market?
3. Determine a reason based in social values that might explain why might the government impose such a policy? In other words, what social value would this price control have that the private market does not satisfy?

2. Consider the graphs below showing shifts in the supply and/or demand curves in the market for U.S. defense goods. D ₁ and S ₁ represent the initial positions of the curves and D ₂ and S ₂ represent the shifts.

Suppose you are looking at the market for U.S. defense goods. Choose the letter of the appropriate diagram that best describes the shift that would occur in each of the following situations. Indicate the change in equilibrium price and quantity (if any). The first one is done for you.

Hint: Ask yourself if the change first affects buyers or sellers. Refer to the non-price determinants for demand and supply listed in the text if necessary. Remember: market price changes of the commodity will not shift the curve(s). Only changes in the non-price determinants will result in a shift of the appropriate curve.

3. On July 1, 2003, consumers were observed buying 10,000 pickles per day at a price of $1.50 per pickle.

On October 1, 2003, the same group was observed buying 8,000 pickles at a price of $1.00 per day.

Two people have been arguing about this. One says that this situation clearly violates the Law of

Demand and the other insists that she can explain this situation WITHOUT violating the Law of

Demand. Draw a set of axes below and show how the second person could be correct (that is, show

how a change in the market can result in a decrease in both the equilibrium price AND quantity

without violating the Law of Demand). What might have happened to cause this? Explain

verbally why is it highly unlikely that this situation violates the Law of Demand.

Price: $15.73

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