Suppose the demand curve for a good is given by the equation Q = 100 - P and the supply curve is given by the equation Q = 0.25P, where P represents the price of the good (measured in dollars per unit) and Q represents the quantity of the good (measured in units per week).
(i) Find the equilibrium price and quantity for this market.
(ii) Suppose quantity demanded for the good rises by 10 units at every possible price while at the same time quantity supplied falls by 5 units at every possible price (with the exception that quantity supplied can not drop below zero units at any price). Find the new equilibrium price and quantity in this market.
(iii) Given the change in demand, how large would the fall in supply need to be (given the same 10 unit rise in demand) in order for the price to decrease instead of increasing as in part (ii)?
(i) Q = 20 units per week and P = $80 per unit.
(ii) Q = 18 units per week and P = $92 per unit.
(iii) Because demand has risen and supply has fallen, the change in price must be positive and hence there is no fall in supply that can increase the price - given that demand has risen.
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