Cobweb Model: Assume there is a production lag such that Firms have to make their decisions at time t-1 on how much output to produce for time t. The market supply and demand curves are then given by the following expressions:

Dt = 200-pt; St = -100+2pt(expected):

(a) Graph the system of equations (x-axis: pt and pt(expected) ) and calculate the market equi- librium (p*; Q*) assuming that p(expected) = p.

Suppose that at time period t = 0, Firms produce S₀ = 120 units of output.

(a) Calculate the price and output for the first three periods (t = 1; 2; 3) under static

expectations. Discuss whether prices converge and why?

(b) Calculate the price and output for the First three periods (t = 1; 2; 3) under adap-

tive expectations with landa = 12 . Discuss whether prices converge and why?