Chap16 Sol - Chapter 16 NAME Equilibrium Introduction...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 16 NAME Equilibrium Introduction. Supply and demand problems are bread and butter for economists. In the problems below, you will typically want to solve for equilibrium prices and quantities by writing an equation that sets supply equal to demand. Where the price received by suppliers is the same as the price paid by demanders, one writes supply and demand as functions of the same price variable, p , and solves for the price that equalizes supply and demand. But if, as happens with taxes and subsidies, suppliers face di ff erent prices from demanders, it is a good idea to denote these two prices by separate variables, p s and p d . Then one can solve for equilibrium by solving a system of two equations in the two unknowns p s and p d . The two equations are the equation that sets supply equal to demand and the equation that relates the price paid by demanders to the net price received by suppliers. Example: The demand function for commodity x is q = 1 , 000 - 10 p d , where p d is the price paid by consumers. The supply function for x is q = 100 + 20 p s , where p s is the price received by suppliers. For each unit sold, the government collects a tax equal to half of the price paid by con- sumers. Let us find the equilibrium prices and quantities. In equilibrium, supply must equal demand, so that 1 , 000 - 10 p d = 100 + 20 p s . Since the government collects a tax equal to half of the price paid by consumers, it must be that the sellers only get half of the price paid by consumers, so it must be that p s = p d / 2. Now we have two equations in the two unknowns, p s and p d . Substitute the expression p d / 2 for p s in the first equation, and you have 1 , 000 - 10 p d = 100 + 10 p d . Solve this equation to find p d = 45. Then p s = 22 . 5 and q = 550. 16.1 (0) The demand for yak butter is given by 120 - 4 p d and the supply is 2 p s - 30, where p d is the price paid by demanders and p s is the price received by suppliers, measured in dollars per hundred pounds. Quantities demanded and supplied are measured in hundred-pound units. (a) On the axes below, draw the demand curve (with blue ink) and the supply curve (with red ink) for yak butter.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
202 EQUILIBRIUM (Ch. 16) 0 40 60 80 100 Yak butter 20 40 60 80 Price 20 120 Blue line Red line p1 q1 q2 p2 (b) Write down the equation that you would solve to find the equilibrium price. Solve 120 - 4 p = 2 p - 30 . (c) What is the equilibrium price of yak butter? $25. What is the equilibrium quantity? 20. Locate the equilibrium price and quantity on the graph, and label them p 1 and q 1 . (d) A terrible drought strikes the central Ohio steppes, traditional home- land of the yaks. The supply schedule shifts to 2 p s - 60. The demand schedule remains as before. Draw the new supply schedule. Write down the equation that you would solve to find the new equilibrium price of yak butter. 120 - 4 p = 2 p - 60 .
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern