Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run (QG = 75 and QS = 300) and that the demands for gold and silver are given by the following equations:
PG = 975 – QG + 0.5PS and PS = 600 – QS + 0.5PG.
a. What are the equilibrium prices of gold and silver?
b. What if a new discovery of gold doubles the quantity supplied to 150. How will this discovery affect the prices of both gold and silver?