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Problem Set #7

# Problem Set #7 - ECON 1001 Problem Set 7 Essay Question...

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ECON 1001 Problem Set 7 Essay Question

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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 *

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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.

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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.
We shall interpret the “25% of the orange crop in Islandia” as a drop in Quantity

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Problem Set #7 - ECON 1001 Problem Set 7 Essay Question...

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