Exam 2: The Basics of Supply and Demand

Use the following statements to answer this question: I.Even though people need water to survive,the price of water is less than the price of diamonds because water is in greater supply than diamonds. II.Suppose that the demand for corn is highly price inelastic.If every corn farmer's harvesting technologies become more efficient,the total revenue received by all corn farmers would fall.

The price elasticity of demand for a demand curve that has a zero slope is

In a city with a medium sized population,the equilibrium price for a city bus ticket is $1.00,and the number of riders each day is 10,800.The short-run price elasticity of demand is -0.60,and the short-run elasticity of supply is 1.0. a.Estimate the short run linear supply and demand curves for bus tickets. b.If the demand for bus tickets increased by 10% because of a rise in the world price of oil,what would be the new equilibrium price of bus tickets? c.If the city council refused to let the bus company raise the price of bus tickets after the demand for tickets increases (see (b)above),what daily shortage of tickets would be created? d.Would the bus company have an incentive to increase the supply in the long run given the city council's decision in (c)above? Explain your answer.

Historically,investors have considered gold commodities to be a good investment to preserve wealth in times of inflation.If investors are no longer worried about inflation and gold demand decreases,what do you expect will happen to gold prices? How would your answer change if you learn that a recent gold mine discovery will increase the supply of gold?

What happens if price falls below the market clearing price?

Coffee and cream: