Question

6. (Worth 3 points) A demand curve and supply curve for video games are given respectively as follows: Qp = 72 – 2P + 2M Qs = 8+ P Where M represents consumer income. Suppose that last year, consumer income was M = $40. Find the equilibrium price and quantity of video games at that income level. In addition, suppose that this year, consumer income is M = $55. Find the equilibrium price and quantity of video games at this new income level. Draw the graph of both the demand and supply curves before and after the change in income. Clearly label any shifts or movements, as well as all curves and equilibrium points as well as numerical values for the equilibrium prices and quantities.

Answer 1

Solution The demand Curne is quen by: a = 72-2P + 2M with M= $40 QD = 12-2p+2x40 ct A p = 152 -2 p The Supply Curne is quen by: Qs = 8+ P with At the Equilibrium, the demand and the supply intersects each other such that : QD = Qs * 152- 2P = 8+ P _ 3P - 144 p =48 Q* - QD - QS = 152-2 P = 56 Ans : P = 49, Q = 56 Carne With = $55, the demand is :00-72-2P + 2M. OD - 72- 2P + 2x55 = 182 - 2 p The Supply Curne is ao = 8+p E at Equilibrium QD = Qs => 182-2P = 8+P & P = 58 Q* = QA = QS = 18 2 - 2 P = 182 - 2x58 = 66 Ans : p = 58, Q* = 66 Scanned with Bintamscanner Asiapu below Otin th

Plotting the graph below: Oougual equilibrium :lo: P-48,0-56 Here M=40 New Equilibrium & p=58,0-66 - Is there M=55 VODO Here Here - 56 66 152 182 there is a parallel shaft of the demand curve ss plots the supply Come & 3 8 +p P = Qs - 8 dp = 1 Its an upward sloping straight line with a slope of 1 & - Here DDo plate the demand cusue when M = 40 &D 72 - 2 P + 2M QD = 152-21 P = 760 of 12 . Us a negative iy sloped line with Stape = -2 Intercepto At Q = 0 Pe 76 i At p= 0, Q = 152 -(0) . Here DA plats the demand curre cohen M=55 & 72 - 2 P + 2M OD = 182 - 2P P = 91 - Q iis anogalinoly sloped Straiplet line with JaD - Slope - %. Intercept : At a = o ; P = 91 At P=0 a = 182 - (2) - Comparine Equation 1&2 we see that both the vertical & horizontal intercept has increased while slape romans Unchayed Hence there is a parallel skyt of the demand Curve of the is due to wincrease in income. CamScanner