Micro question - equilibrium price, pretty easy The table below represents the w
ID: 1221250 • Letter: M
Question
Micro question - equilibrium price, pretty easy
The table below represents the world supply and demand for natural vanilla in thousands of pounds. A large portion of natural vanilla is grown in Madagascar and comes from orchids that require a lot of time to cultivate. The event described below actually happened, but the numbers have been altered to make the calculations easier (See James Altucher, "Supply, Demand, and Edible Orchids," Financial Times, September 20, 2005, p.12). Assume the original supply and demand curves are represented in the table below. Assume that Madagascar is hit by a hurricane (which actually occurred in 2000), and the world's supply of vanilla is reduced by 5/6, or 83%. Now assume that Coca-Cola announces plans to introduce a new "Vanilla Coke," and this increases the demand for natural vanilla by 25%. What will be the new equilibrium price? just above $10 just above $20 just above $30Explanation / Answer
The previous equilibrium is quantity supplied=quantity demanded=12 and price is 20. Now with the change , the quantity supplied is reduced by (5/6)*12=10.So the new supply is 12-10=2. The demand is increased by (25/100)*12=3. So the new quantity demanded is 12+3=15. So the difference between quantity demanded and quantity supplied is 15-2=13. Thus we can say it will lie just above price $30.