Question 1 Assume that the equation for demand for bread at a small bakery is Qd

Question

Question 1

Assume that the equation for demand for bread at a small bakery is Qd = 60 - 10Pb + 3Y, where Qd is the quantity of bread demanded in loaves, Pb is the price of bread in dollars per loaf, and Y is the average income in the town in thousands of dollar. Assume also that the equation for supply of bread is Qs = 30 + 20Pb - 30 Pf, where Qs is the quantity supplied and Pf is the price of flour in dollar per kilogram. Assume finally that markets clear, so that Qd = Qs.

If Y is 10 and Pf is $1, solve mathematically for equilibrium Q and Pb.

If the average income in the town increases to 15, solve for the new equilibrium

      Q and Pb.

Comparing your answer in (a) and (b) above, how has the increase in income

      impacted the consumer and supplier behavior?

Explanation / Answer

Demand equation for bread at a small bakery : Qd = 60- 10Pb +3Y

Supply equation for bread : Qs = 30+ 20 Pb - 30 Pf

Y = 10

Pf = $1

Market is in equillibrium,so Qd = Qs

60 -10Pb +3Y = 30 + 20 Pb -30 Pf

Substituting the values, we get

60 - 10Pb + 3*10 = 30 + 20 Pb -30 * 1

-10Pb -20 Pb = 30 - 30 -30- 60

-30 Pb = -90

Pb = -90/ -30

Pb = 3

Qd = 60 - 10 * 3 + 3* 10

= 60- 30 +30

=60

So, Qd = 60

Qs = 30 + 20*3 - 30 * 1

= 30 + 60 - 30

= 60

So Qs = 60

Now Y = 15

New Equillibrium

60 - 10Pb + 3*15 = 30 + 20 Pb -30 * 1

-10 Pb - 20Pb = 30-30 -45 - 60

-30 Pb = -105

Pb = -105 / -30

= 3.5

So, New Pb = 3.5

Q = 60 - 10*3.5 + 3*15

= 60 - 35 + 45

= 70

Increase in Income increases the price of the commodity. This is because as the income rises, the quantity demanded increases. This is because the purchasing power of the people increases. As a result the quantity supplied also rises.This is because of the increase in price the profit margins of the supplier increases by supplying more, and thus a new state of equillibrium is achieved.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.