Suppose that the market demand function for Good X is Qd = 160 − 30p + 2Y and its market supply function is Qs = 100 + 50p. (a) Find the market equilibrium price and quantity when Y = 50. (b) Suppose that income increases to Y = 90 so that there is a new demand function. At the equilibrium price you find in (a), do we have a shortage or surplus under the new demand function? How large is it? (c) A market free of interventions cannot be in equilibrium when there is a shortage or surplus. Your answer to (b) then implies that the equilibrium price you find in (a) can no longer be an equilibrium when Y = 90. Find the new market equilibrium price and quantity. How did price change to “clear” the market?
. Suppose that the
market supply function is Qs = 100 + 50p.
(a) Find the
(b) Suppose that income increases to Y = 90 so that there is a new demand function.
At the equilibrium price you find in (a), do we have a shortage or surplus under
the new demand function? How large is it?
(c) A market free of interventions cannot be in equilibrium when there is a shortage or
surplus. Your answer to (b) then implies that the equilibrium price you find in (a)
can no longer be an equilibrium when Y = 90. Find the new market equilibrium
price and quantity. How did price change to “clear” the market?
(d) Suppose that, under the new demand function, the government imposes a price
ceiling at $2.5. What will be the quantity of the good transacted in the market?
(e) Suppose that, under the new demand function, the government imposes a price
floor at $2.5. What will be the quantity of the good transacted in the market?
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