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?
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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.