Microeconomics
Microeconomics
2nd Edition
ISBN: 9780073375854
Author: B. Douglas Bernheim, Michael Whinston
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
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Chapter 2, Problem 3P
To determine

Equilibrium price.

Expert Solution & Answer
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Explanation of Solution

The demand function for corn is given below:

Qd=52(Pricecorn)+4(Pricepotatoes)0.25(Pricebutter)+0.0003(Average income)        (1)

The supply function of corn is shown below:

Qs=9+5(Pricecorn)2(Pricefuel)1.25(Pricesoybeans)        (2)

To calculate the equilibrium price, equate the supply and demand function.

(9+5(Pricecorn)2(Pricefuel)1.25(Pricesoybeans))=(52(Pricecorn)+4(Pricepotatoes)0.25(Pricebutter)+0.0003(Average income))(9+5(Pricecorn)2(2.75)1.25(10))=(52(Pricecorn)+4(0.75)0.25(4)+0.0003(40,000))(9+5(Pricecorn)5.512.5)=52(Pricecorn)+31+127Pricecorn=28Pricecorn=287Pricecorn=4

The equilibrium price is $4.

Substitute the price ($4) in supply function to calculate the quantity of corn that can be bought and sold.

Qs=9+5(4)2(2.75)1.25(10)Qs=9+205.512.5Qs=11

The quantity of corn that can be bought and sold is 11 units.

If the fuel price increases to $4.50 per gallon, the price corn will increase to $4.50. The quantity supply of corn is calculated as follows:

Qs=9+5(PriceCorn)912.5=55(PriceCorn)+31+1231.50=7PriceCornPriceCorn=317PriceCorn=4.5

Price is $4.5.

Substitute this $4.5 to quantity supply.

Qs=9+5(4.5)2(4.5)1.25(10)Qs=9+22.5912.5Qs=10

The quantity supplied is 10 units.

Economics Concept Introduction

Demand: Demand refers to the total value of goods and services produced in an economy during a period of time at particular price.

Supply: Supply is defined as the quantity of a commodity offered for sale at particular price during a period of time.

Equilibrium price and quantity: The intersecting point of demand and supply curve is the equilibrium point. The corresponding price and quantity of equilibrium points are the equilibrium price and equilibrium quantity, respectively.

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