Question 1

Imagine that you have been given a job as an economic advisor to evaluate a certain competitive US manufacturing industry.Your (accurate) statistical analysis indicates the market is characterized by demand of Q_d = 400 - 4P and supply of Q_s = 2P - 50.

Solve for equilibrium price P₁ and quantity Q₁.

Depict the supply curve S₁ and demand curve D₁ on the usual P, Q diagram. Label all intercepts. Clearly indicate and label the market equilibrium.

Graphically indicate the areas of Consumer Surplus (CS) and Producer Surplus (PS).

Compute the values of Consumer Surplus (CS) and Producer Surplus (PS).

Question 2

Continuing your analysis of the competitive US manufacturing industry from Question 1, with demand of Q_d = 400 - 4P and supply of Q_s = 2P - 50, suppose a technological innovation causes the supply curve to increase, shifting the curve down by $15 for every given quantity Q.

Determine the new supply equation. Solve for equilibrium price P2 and quantity Q2.

Depict the original supply S1, the new supply S2, and the original demand D1 on the usual P, Q diagram. Label all intercepts. Clearly indicate and label the new market equilibrium.

Graphically indicate the areas of Consumer Surplus (CS) and Producer Surplus (PS) that resulted from the new market equilibrium.

Compute the values of Consumer Surplus (CS) and Producer Surplus (PS) associated with the new market equilibrium.

Who has benefited from technological innovation, based on the comparison of CS and PS in Questions 1 and 2? Consumers, producers, or both? Why? (Narrative response; suggested length of three to four sentences or one paragraph.)