TEMPLE UNIVERSITY

Department of Economics

Supply and Demand Equilibria

It is possible to do this homework in any one of two ways. The first method is the tried and true method of pencil, eraser and graph paper. The second possibility is to use a bit of basic algebra in solving two equations for two unknowns.

Name

In this exercise we will adopt the following notation:

P - price

Q - quantity

T - technology

Y - income

A - advertising

Diskettes are made by a large number of manufacturers and are purchased by a large number of people. Thus, no one on either side of the market has undue influence in the market. The supply curve for diskettes is given by

P = 1.866*Q + .15*T - 170.

The demand curve is given by

P = .5*Y + .01*A - 1.6*Q + 180

Initially the following data are observed

Y = 100

A = 2400

T = 50

1. What are the equilibrium price and quantity?

2. If, all other things equal, income rises to 120 what will be the new equilibrium price and quantity?

3. Now return to the original data and find the new equilibrium when advertising is 2000 instead of 2400: Price and quantity.

4. Again return to the original data. Suppose income falls to 90 but the new value for technology is 75; advertising remains unchanged. Find the new equilibrium price and quantity.