Question 2: 50 points

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

1. Derive and graph the inverse supply and inverse demand curves
2. Solve for the equilibrium price and quantity
3. Suppose that supply changes so that at each price, 20 fewer towels are offered for sale. Derive and graph the new inverse supply curve.
4. Solve for the new equilibrium price and quantity. How does the decrease in supply affect the equilibrium price and quantity sold?
5. Suppose instead that supply does not change, but demand decreases so that at each price, 25 fewer towels are desired by consumers. Solve for the new equilibrium price and quantity. How does the decrease in demand affect the equilibrium price and quantity?

Question 2 - Part 1

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

1. Derive and graph the inverse supply and inverse demand curves

Question 2 - Part 2a

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

2. Solve for the equilibrium price and quantity

The equilibrium price is

Question 2 - Part 2b

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

2. Solve for the equilibrium price and quantity

The equilibrium quantity is

Question 2 - Part 3

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

Suppose that supply changes so that at each price, 20 fewer towels are offered for sale. Derive and graph the new inverse supply curve.

Question 2 - Part 4a

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

Suppose that supply changes so that at each price, 20 fewer towels are offered for sale.

Solve for the new equilibrium price and quantity.

The equilibrium quantity is

Question 2 - Part 4b

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

Suppose that supply changes so that at each price, 20 fewer towels are offered for sale.

Solve for the new equilibrium price and quantity.

The equilibrium price is

Question 2 - Part 4c

Suppose the demand for towels is given by Q^D = 100 - 5P, and the supply of towels is given by Q^S = 20P

Suppose that supply changes so that at each price, 20 fewer towels are offered for sale.

How does the decrease in supply affect the equilibrium price and quantity sold?