Economics supply and demand

ECO 20250 Nagler

HOMEWORK #2

• Please answer all parts of all questions on a separate sheet for full credit. Show your work. • Please upload your completed homework to Blackboard by the due date/time.

1. Suppose the demand curve for a product is given by 𝑄 = 300 − 2𝑃 + 4𝐼, where I is average

income measured in thousands of dollars. The supply curve is 𝑄 = 3𝑃 − 50. a. If 𝐼 = 25, find the market-clearing price and quantity for the product. b. If 𝐼 = 50, find the market-clearing price and quantity for the product. c. Draw a graph to illustrate your answers.

2. Sorghum is traded in a competitive world market, and the world price is $9 per pound.

Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:

PRICE U.S. SUPPLY (MILLION

POUNDS) U.S. DEMAND (MILLION

POUNDS) 3 2 34 6 4 28 9 6 22

12 8 16 15 10 10 18 12 4

a. What is the equation for demand? What is the equation for supply? b. At a price of $9, what is the price elasticity of demand? What is it at a price of $12? c. What is the price elasticity of supply at $9? At $12? d. In a free market, what will be the U.S. price and level of sorghum imports?

3. The city council of a small college town decides to regulate rents in order to reduce student

living expenses. Suppose the average annual market-clearing rent for a two-bedroom apartment had been $700 per month and that rents were expected to increase to $900 within a year. The city council limits rents to their current $700-per-month level.

a. Draw a supply and demand graph to illustrate what will happen to the rental price of an apartment after the imposition of rent controls.

b. Do you think this policy will benefit all students? Why or why not?