ECON 301 University of California Berkeley Market Demand and Equilibrium Questions

Question 1 (Market Demand and Equilibrium) Suppose the demand for cigarettes is perfectly inelastic, while
the supply of cigarettes slopes upward from left to right. The equilibrium price of cigarettes is $5 and the
equilibrium quantity is 100 packs.
a) Draw the market for cigarettes given the information above. Label the equilibrium point, axes, and any
intercepts
b) What would happen if the price of cigarettes were $6 per pack and not at the equilibrium of $5 per pack?
Would it stay at $6 per pack? Briefly explain.
c) Suppose that as a result of government anti-smoking campaigns, the demand for cigarettes decreases to 80
packs (but is still perfectly inelastic). What would happen to the equilibrium price (increase, decrease, not
change)? What is the new quantity?
Question 2 (Equilibrium) A store in downtown San Francisco is debating whether to have a sale (decrease prices)
on shoes this coming holiday season. The owner remembers that in 2017 the sale on shoes increased her revenue
from shoe sales. In 2018, the shoe sale caused a decrease in revenues from shoe sales.
a) What can we conclude about the price elasticity of demand in 2017? Briefly explain.
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b) What can we conclude about the price elasticity of demand in 2018? Briefly explain.
Question 3 (Equilibrium) The supply and demand curves for nights at hotels in San Francisco are given by:
D(p)=400-p
S(p)=p
Suppose the government imposes a tax of $20 per night in order to increase its revenues.
a) What is the original price consumers pay per night? What is the new price consumer’s pay per night? What
is the new price hotels receive per night? What is the change in quantity with the implementation of the
tax?
b) What is the city of San Francisco’s