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13'. (16 points, 4 points each, graded on completion] Consider the markets for coffee {c} and sugar (3), which are complements in consumption. {T he
13'. (16 points, 4 points each, graded on completion] Consider the markets for coffee {c} and sugar (3), which are complements in consumption. {T he variable 3' is used for sugar to avoid mixing it up with s whidi is used to represent supply here.) in die market for coffee, the equilibrium, demand function, and supply function is dened by (23:12? {23:18 Pr Hg {23:15: where Q; is the quantity of coffee demanded, Q5 is the quantity of coffee supplied Pr is the price of coffee, and P3 is the price of sugar Quantities are in millions of pounds and prices are in dollars per pound. In the market for sugar, the equilibrium, demand function, and supply function is defined by are; Qg=1s P, I), Ql=Pg (a) Find the equilibrium price and quantity of coffee and sugar in this market. A study funded by the National Association of Coffee Growers will shortly be released, showing that coffee decreases the likelihood of an obscure but scary sounding medical condition. This is expected to increase le demand for coffee by 6 million pounds a year, making the new demand function Q? =24 Pr Pg {b} An naive analyst is hired to estimate the impact of this change on prices and quantities. They assume that the price of sugar is fixed at P3 = I3. if the analyst's assumptions were true, what would the new equilibrium price and quantity of coffee be? (c) You've been hired to chedt: their work. Using the actual model presented above, find the new equilibrium price and quantity of both coffee and sugar. (d) Consider your answers to 7b and 7c. Does the fact that the price of sugar responds to changes in the market for coffee amplify or dampen the impact of an exogenous increase in demand in the coffee market? (In other, more precise, words: Would the price/ quantity increase in the market for coffee be higher or lower than if there were no general equilibrium effects?) Did an increase in the demand for coffee increase the demand for sugar? In your own words, and without math, describe what happened
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