Question: The graph shows the market for gum after a fire has destroyed half the gum factories.

1. What is the original equilibrium price of gum? (Label this on the graph as P ₁ )
2. What is the original equilibrium quantity of gum? (Label this on the graph as Q ₁ )
3. What is the new equilibrium price of gum? (Label this on the graph as P ₂ )
4. What is the new equilibrium quantity of gum? (Label this on the graph as Q ₂ )
5. Has there been a shift or a movement along the supply curve of gum? Why?
6. Has there been a shift or a movement along the demand curve of gum? Why?
7. As the gum factories destroyed by fire are rebuilt and gradually resume gum production, what will happen to: (i) The price of gum? (ii) The quantity of gum bought? (iii) The demand for gum? (iv) The supply of gum?
8. Draw Case G on the graph below and show a hypothetical equilibrium price and equilibrium quantity. Remember to label the Equilibrium points on the graph and draw all of the arrows indicating changes. (Note your supply curve may shift back to the original point or be greater or weaker than the original curve depending on how much capacity you rebuild.) State your assumption when drawing.)

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