Suppose that the supply of tomato soup in a city is represented by Qs = 100P – 10P - 50 where P is the price of tomato soup and Pr is price of tomato needed to produce tomato soup. All prices are in dollars and quantity is in liters. Assume that the current tomato price is $15. Suppose that the demand for the tomato soup is QD = 1000–60P + 0.31 where P is the price of the tomato soup and I is a representative household's income. Assume that at the equilibrium, income is $12000. a) What are the current equilibrium price and quantity of the tomato soup? Show the equilibrium on a detailed graph. b) Suppose that income decreases to $10400. What is the new equation for the demand for tomato soup? Does this correspond to an increase or decrease in the demand for tomato soup? Show the effect of this event on the equilibrium and the diagram you used in part (a) c) Start from the equilibrium in part a) and now suppose that the price of the tomato increases to $47. What is the new equation for the supply of tomato soup? Does this correspond to an increase or decrease in supply of tomato soup? Show the effect of this event on the equilibrium and the diagram you used in part a)?

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Chapter1: Making Economics Decisions
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Suppose that the supply of tomato soup in a city is represented by
Qs = 100P – 10PT – 50
where P is the price of tomato soup and Pr is price of tomato needed to produce tomato soup. All prices are in
dollars and quantity is in liters.
Assume that the current tomato price is $15.
Suppose that the demand for the tomato soup is QD = 1000–60P + 0.31
where P is the price of the tomato soup and I is a representative household's income.
Assume that at the equilibrium, income is $12000.
a) What are the current equilibrium price and quantity of the tomato soup? Show the equilibrium on a detailed
graph.
b) Suppose that income decreases to $10400. What is the new equation for the demand for tomato soup? Does
this correspond to an increase or decrease in the demand for tomato soup? Show the effect of this event on
the equilibrium and the diagram you used in part (a)
c) Start from the equilibrium in part a) and now suppose that the price of the tomato increases to $47. What is
the new equation for the supply of tomato soup? Does this correspond to an increase or decrease in supply of
tomato soup? Show the effect of this event on the equilibrium and the diagram you used in part a)?
d) Given that the changes in income and input prices are permanent, calculate the new equilibrium for the market,
i.e. Pr-S47 and Income =$10400. Show your findings on a graph.
e) Go back to part a), calculate the income elasticity of demand at equilibrium. Is tomato soup normal good for
consumers?
f) Go back to part a), calculate the price elasticity of supply at equilibrium. Is the supply elastic at the
equilibrium?
Transcribed Image Text:Suppose that the supply of tomato soup in a city is represented by Qs = 100P – 10PT – 50 where P is the price of tomato soup and Pr is price of tomato needed to produce tomato soup. All prices are in dollars and quantity is in liters. Assume that the current tomato price is $15. Suppose that the demand for the tomato soup is QD = 1000–60P + 0.31 where P is the price of the tomato soup and I is a representative household's income. Assume that at the equilibrium, income is $12000. a) What are the current equilibrium price and quantity of the tomato soup? Show the equilibrium on a detailed graph. b) Suppose that income decreases to $10400. What is the new equation for the demand for tomato soup? Does this correspond to an increase or decrease in the demand for tomato soup? Show the effect of this event on the equilibrium and the diagram you used in part (a) c) Start from the equilibrium in part a) and now suppose that the price of the tomato increases to $47. What is the new equation for the supply of tomato soup? Does this correspond to an increase or decrease in supply of tomato soup? Show the effect of this event on the equilibrium and the diagram you used in part a)? d) Given that the changes in income and input prices are permanent, calculate the new equilibrium for the market, i.e. Pr-S47 and Income =$10400. Show your findings on a graph. e) Go back to part a), calculate the income elasticity of demand at equilibrium. Is tomato soup normal good for consumers? f) Go back to part a), calculate the price elasticity of supply at equilibrium. Is the supply elastic at the equilibrium?
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