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Chapter 3: Problem 7

The following table gives hypothetical data for the quantity of gasoline demanded and supplied in Los Angeles per month. $$\begin{array}{ccc}\text { price per Gallon } & \begin{array}{c}\text { Quantity Demanded (millions } \\\\\text { of gallons) }\end{array} & \begin{array}{c}\text { Quantity Supplied (millions of } \\\\\text { gallons) }\end{array} \\\\\hline \$ 1.20 & 170 & 80 \\\\\$ 1.30 & 156 & 105 \\\\\$ 1.40 & 140 & 140 \\\\\$ 1.50 & 123 & 175 \\\\\$ 1.60 & 100 & 210 \\\\\hline \$ 1.70 & 95 & 238\end{array}$$ a. Graph the demand and supply curves. b. Find the equilibrium price and quantity. c. Illustrate on your graph how a rise in the price of automobiles would affect the gasoline market.

Short Answer

Expert verified
The equilibrium price is $1.40 and the equilibrium quantity is 140 million gallons. A rise in the price of automobiles would shift the demand curve for gasoline to the left, representing a decrease in its demand and leading to a potentially lower new equilibrium price and definitely a lower quantity if supply remains the same.

Step by step solution

01

Graph the Demand and Supply Curves

On a graph, make the y-axis 'Price per Gallon' and the x-axis 'Quantity (millions of gallons)'. For each price in the table, plot a point on the graph that corresponds to the quantity demanded and to the quantity supplied. Connect the points for quantity demanded with a line to form the demand curve. Do the same for quantity supplied to get the supply curve.
02

Locate the Equilibrium Price and Quantity

Look for the point where the demand and supply curves intersect on your graph. At this point, the quantity demanded equals the quantity supplied. This point is the equilibrium point and the price and quantity at this point are the equilibrium price and quantity.
03

Illustrate the Effect of Price of Automobiles on the Gasoline Market

A rise in the price of automobiles decreases the demand for gasoline, shifting the demand curve to the left. Since the supply remains the same, this results in a new equilibrium point, which will be lower in quantity and potentially lower in price depending on the elasticity of the supply curve.

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