This question begins with equations that have been estimated for the supply and demand

of a normal good.

i.

In part a, you must find the equilibrium level of price and quantity for the market.

ii.

In part b, there has been an increase in the income of all consumers causing a

change in demand but no change in supply. You must find the new equilibrium

levels of price and quantity.

iii.

In part c, there has been an increase in the cost of the labor used to produce the

good resulting in a decrease in the supply of the good. Using the demand equation

from part b, what are the effects upon equilibrium price and quantity brought about

by this change in supply?

Part A:

To begin, use the following equations to find the market price and quantity:

Q

D

= 209.85 - 7.45(P); Q

S

= -69.95 + 6.54(P)

Part B:

Due to a tax cut, consumers experience an increase in income. As income rises, the

demand for the good described in Part A increases. Using the new demand equation

below with the same supply equation from Part A, solve for the new market price and

quantity:

Q

D

= 447.68 - 7.45(P); Q

S

= -69.95 + 6.54(P)

Part C:

The government has decided that the production of the good in this market produces too

much pollution and institutes a new set of pollution abatement standards that raises the

cost of production; this causes a decrease in supply. Using the demand equation from

Part B and the new supply equation below, solve for the new market price and quantity:

Q

D

= 447.68 - 7.45(P); Q

S

= -111.92 + 6.54(P)