Question

10 points. 2. Suppose that for pizza: the demand equation is: P = 200 - 400 the supply equation is: Qs = p - 25 a) What is the equilibrium price and quantity in the market for pizzar b) Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza: (Note: Draw a new diagram for each case do not illustrate all events on one single diagram. With each diagram, start by illustrating the equilibrium conditions from part a. before proceeding to illustrate the effect of the event. Be sure to label all graphs/diagrams - including the directional i. The price of tomato sauce, an ingredient of pizza, rises. ii. Consumer income increases, assuming pizza is an inferior good.

Answer 1

Solution

(a) P = 200 - Q_d ; Q_s = (1/6) P - 25

At Equilibrium price, the supply and demand are equal

Q_s = Q_d => 200 - P =(1/6)P - 25 => P = 262.50

Equilibrium Quantity Q_e = (1/6) P -25 i.e., Q e = 18.75

(b) (i) When the price of tomatoes (which is a raw material for pizza) increases,the supply decreases i.e., the supply curve shifts leftwards to S₁ S₁^'  from S S₁^'

(ii) when the income increases,since pizza is a inferior good,it's demand decreases i.e., the demand curve shifts leftwards to D₁D₁^'  from D D₁^'

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