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Unformatted text preview: ECON 1001 Problem Set 7 Essay Question Background Story: Market for Oranges in Islandia Demand: P = 9  0.8Q D Supply : P = 1 + 0.2Q S P is in dollars; Q is in hundreds of pounds Question 1: Find the equilibrium Price and Quantity in the market for oranges. At the equilibrium, Q D = Q S . Let us call the Equilibrium Quantity Q * . Also, there will only be one Price, the Equilibrium Price, P * To find Q * and P * , we solve the two equations (Demand and Supply) mathematically. P = 9  0.8Q D (1) P = 1 + 0.2Q S (2) Equating (1) and (2) 9 0.8Q D = 1 + 0.2Q S At equilibrium, Q D = Q S = Q * , so 9 0.8Q * = 1 + 0.2Q * Q * = 8 P * = 2.6 Therefore, the equilibrium price is $2.6, and the equilibrium quantity is 800 pounds of oranges. Question 2: A storm destroys 25% of the orange crop in Islandia. This results in a lower quantity supplied. Assuming Demand does not change, draw a Demand and Supply Diagram to show what will happen to the equilibrium....
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This note was uploaded on 04/18/2011 for the course ECON 1001 taught by Professor S.c during the Spring '10 term at HKU.
 Spring '10
 S.C

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