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Finding equilibrium price and quantity

The supply and demand for the paper firm is given by:

QS=100P-5000

and

QD=0.5 i + 0.2A-100P+5000

where Q is the quantity per year, P is price, I is income per household, and A is advertising expenditure.

a. If A=$10,000 and I =$25,000, what is the demand curve?

b. Plot the demand curve found in part A with the supply curve, then use the graph to find the equilibrium price and quantity.

c. If consumer incomes increase to $30,000, what will be the new equilibrium price and the new equilibrium quantity?

Solution Preview

Please refer attached file for missing graphs.

a. If A=$10,000 and I =$25,000, what is the demand curve?

QD=0.5 i + 0.2A-100P+5000
Put I=$25000
A=10000
QD=0.5*25000+0.2*10000-100P+5000=19500-100P

b. Plot the demand curve found in part A with the supply curve, then use the graph to find the equilibrium price and quantity.

P QD QS
=19500-100P =100P-5000
112.5 8250 6250
115 8000 6500
117.5 7750 ...

Solution Summary

Solution describes the steps to determine equilibrium price and quantity. It also determines new equilibrium price and quantity following an increase in income level.

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