1. 1. The annual Supply and demand for the Paper Firm is given by:

QS = 100P - 5000
and
QD = 0.5 I + 0.2 A - 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?
QD = 12500 + 2000 - 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.
See the attached file. The equilibrium price is about 122.5 and the equilibrium quantity is about 7250.

c. If consumer incomes increase to $30,000, what will be the new equilibrium price and the new equilibrium quantity?
The new demand curve is QD = 15000 + 2000 - 100P + 5000 = 22000 -100P
The equilibrium price is
100P - 5000=22000-100P
200P = 27000
P = 135

2. What will be the effect on the demand curve, and what will happen to market equilibrium price and quantity in the short run if, Consumers expect that the price of the good will be higher in the future. (Points : 2)
Demand increases ; equilibrium price and quantity increase.
An expectation of higher prices causes the demand curve to shift outward. This results in higher prices and quantity sold.

3. From 2001 to 2004, the real price of eggs decreased and the total annual consumption of eggs decreased. Which of the following would cause an unambiguous decrease in the real price of eggs and an unambiguous decrease in the quantity of eggs ...

Solution Summary

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