intermediate economics

Intermediate Microeconomic Theory (ECON 021)

HOMEWORK 5

Answers must be as detailed as possible NAME:…………………………………………….. Date: 2020/08/06

10 Marks

1. Because many consumers choose between coffee and tea, the coffee and tea demand

functions depend on both prices. Suppose the demand curves for coffee and tea are

Qc = 120 - 2pc + pt,

Qt = 90 - 2pt + pc,

where Qc is the quantity of coffee, Qt is the quantity of tea, pc is the price of coffee,

and pt is the price of tea. These crops are grown in separate parts of the world, so their

supply curves are not interrelated. We assume that the short-run, inelastic supply

curves for coffee and tea are Qc = 45 and Qt = 30. Solve for the equilibrium prices and

quantities. Now suppose that a freeze shifts the short-run supply curve of coffee to Qc

= 30. How does the freeze affect the prices and quantities?