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Effect of price freeze on equilibrium parameters

Price per gallon $2.00 2.25 2.50 2.75 3.00 3.25 3.50
Quantity demanded 26 25 24 23 22 21 20
Quantity supplied 16 20 24 28 32 36 40

(a) What is the equilibrium?
(b) If supply at every price is reduced by 10 gallons, what will the new equilibrium price be?
(c) If the government freezes the price of gasoline at its initial equilibrium price, how much of a surplus or shortage will exist when supply is reduced as described above?
(d) Illustrate answers on a graph.

Solution Preview

Please refer attached file for graph.

(a)What is the equilibrium?

Price Quantity Demanded Quantity Supplied
P Qd Qs
2.00 26 16
2.25 25 20
2.50 24 24
2.75 23 28
3.00 22 32
3.25 21 36
3.50 20 40

We know that quantity ...

Solution Summary

Solution describes the steps to calculate equilibrium price, equilibrium quantity and surplus/shortage based upon given information.

$2.19