Suppose that the (inverse) demand equation for organic tea is P = 230 - 4Qd and the (inverse) supply curve for organic tea is P = 0.6Qs in a local market. Quantities are
measured in pounds per week, and price is measured in dollars per pound of tea. Find the
equilibrium quantity and price in this market.
Suppose recent regulations for organic tea production, established by the Food and Drug
Administration, increase the costs for producers of organic tea. Under these regulations,
the new (inverse) supply curve for tea is as follows: P = 16 + 0.6Qs. Find the new market
equilibrium quantity and price under these conditions. (Assume that the demand equation
remains the same.) Compare the original equilibrium quantity and price to the new
equilibrium quantity and price. Has price fallen or risen? Has quantity exchanged fallen
or risen?
Sketch a supply-and-demand graph to illustrate the market before and after the regulation
goes into effect (graph paper is not required for this sketch). In this example, has supply
increased or decreased? Are the directions of change in price and quantity that you found
from your computations consistent with this supply increase or decrease?