If demand is represented by Qd = 50 - 0.5P + 0.005I where I = $50,000 and supply is represented by Qs = 100 + 0.4P -2W where wages (W) = $15.00, compute the equilibrium price and quantity. What happens if income falls to I = $40,000?
What will be an ideal response?
Qd = 50 - 0.5P + 0.005 (50,000) = 50 - 0.5P + 250 = 300 - 0.5P. Qs = 100 + 0.4P ? 2(15) = 100 + 0.4P - 30 = 70 + 0.4P. In equilibrium the quantity demanded is equal to the quantity supplied: 300 - 0.5P = 70 + 0.4P. Therefore, the equilibrium price = 230/0.9 = $255.56. Substituting the price value in either the quantity demanded equation or the quantity supplied equation gives us the equilibrium quantity. Therefore, the equilibrium quantity = 300 - 0.5 (255.56) = 300 - 127.78 = 172.22 units. When income falls to $40,000, the new demand function is Qd = 50 - 0.5P + 0.005 (40,000) = 50 - 0.5P + 200 = Qd = 250 - 0.5P. The supply function is Qs = 70 + 0.4P. In equilibrium the quantity demanded is equal to quantity supplied. Therefore, 250 - 0.5P = 70 + 0.4P = 250 - 70 = 0.4P + 0.5P = 180 = 0.9P = $200 is the new equilibrium price. Substituting the price value in either the quantity demanded equation or the quantity supplied equation gives us the equilibrium quantity. Therefore, the equilibrium quantity = 250 - 0.5 (200) = 150 units.
You might also like to view...
Labor productivity, real GDP per labor hour, increases if
A) saving and investment cause an increase in the quantity of capital per worker. B) there is an increase in the accumulation of human capital. C) new technologies are continuously discovered. D) All of the above answers are correct.
A factory recently added new robots to its production line, increasing productivity. This will likely cause a:
A. rightward shift of the supply curve. B. leftward shift of the supply curve. C. shift downward of the supply curve. D. movement up along the supply curve.
In economics, we assume rational decisions are made when individuals weigh:
A. the sunk costs versus the benefits of an action. B. the sunk costs versus the opportunity costs of an action. C. the opportunity costs versus the benefits of an action. D. the opportunity and sunk costs versus the benefits of an action.
In the long run, the representative firm in monopolistic competition tends to have:
A. excess capacity. B. a perfectly elastic demand curve. C. economic profits. D. limited product differentiation.