Intermediate Price Theory
Intermediate Price Theory
Problem Set 1 -- Supply and Demand
1. Assume that the United States demand curve for corn is
QD = 80 - 2P
where P is the price of corn (in dollars per bushels) and QD is the quantity of demanded of corn ( in billions of bushels) and that
QS = 20 + 4P
is the supply curve for corn where QS is the quantity of corn supplied (in billions of bushels).
a. What are the equilibrium price and quantity? At equilibrium, QD =QS 80 - 2P= 20 + 4P 6P = 60 P = $10 Qd = 80 – 2(10) = 80 -20 = 60 billion bushels Qs = 20 + 4(10) = 60 billion bushels
b. What is the slope of the Demand?
The slope of the demand is -2 which implies an inverse relationship between price and quantity demanded. This indicates that if price will go up by a dollar unit, quantity demanded will fall by 2 units.
c. What is the slope of the Supply?
The slope of the supply is +4which implies a direct relationship between price and quantity supplied. This indicates that if price will go up by a dollar unit, quantity suppliedwill rise by 4 units.
d. Suppose the market price is below the equilibrium price. What would you expect to happen to the market price and the QD and the QS as the market adjusts to the disequilibrium? Why?
If the market price is set below the equilibrium price, more will be demanded than supplied, (Qd>Qs). This creates a shortage of the goods in the market. The amount of shortages will cause buyers to bid up the price in order to acquire the goods. Competition among buyers will bid up the price. Price will go up until shortages are eliminated.
e. Suppose the supply shifts to
QS = 30 + 4P Has the slope of the supply changed? Why or why not?
No, the slope of the supply remained the same. Only the intercept changed. The rate of change in quantity
Problem Set 1 -- Supply and Demand
1. Assume that the United States demand curve for corn is
QD = 80 - 2P
where P is the price of corn (in dollars per bushels) and QD is the quantity of demanded of corn ( in billions of bushels) and that
QS = 20 + 4P
is the supply curve for corn where QS is the quantity of corn supplied (in billions of bushels).
a. What are the equilibrium price and quantity? At equilibrium, QD =QS 80 - 2P= 20 + 4P 6P = 60 P = $10 Qd = 80 – 2(10) = 80 -20 = 60 billion bushels Qs = 20 + 4(10) = 60 billion bushels
b. What is the slope of the Demand?
The slope of the demand is -2 which implies an inverse relationship between price and quantity demanded. This indicates that if price will go up by a dollar unit, quantity demanded will fall by 2 units.
c. What is the slope of the Supply?
The slope of the supply is +4which implies a direct relationship between price and quantity supplied. This indicates that if price will go up by a dollar unit, quantity suppliedwill rise by 4 units.
d. Suppose the market price is below the equilibrium price. What would you expect to happen to the market price and the QD and the QS as the market adjusts to the disequilibrium? Why?
If the market price is set below the equilibrium price, more will be demanded than supplied, (Qd>Qs). This creates a shortage of the goods in the market. The amount of shortages will cause buyers to bid up the price in order to acquire the goods. Competition among buyers will bid up the price. Price will go up until shortages are eliminated.
e. Suppose the supply shifts to
QS = 30 + 4P Has the slope of the supply changed? Why or why not?
No, the slope of the supply remained the same. Only the intercept changed. The rate of change in quantity