Question

1. . Florida Orange Juice is a product of Florida's Orange Growers' Association. Demand and supply of the product are both highly sensitive to changes in the weather. During hot summer months, demand for orange juice and other beverages grows rapidly. On the other hand, hot dry weather has an adverse effect on supply by reducing the size of the orange crop.

Demand and supply functions for Florida orange juice are as follows:

	QD	= 4,500,000 - 1,200,000P + 2,000,000PS
		+ 1,500Y + 100,000T	(Demand)
	QS	= 8,000,000 + 2,400,000P - 500,000PL
		- 80,000PK - 120,000T	(Supply)

where P is the average price of Florida ($ per case), P_S is the average retail price of canned soda ($ per case), Y is income (GNP in $billions), T is the average daily high temperature (degrees), P_L is the average price of unskilled labor ($ per hour), and P_K is the average cost of capital (in percent).

A.	When quantity is expressed as a function of price, what are the Florida demand and supply curves if P = $11, PS = $5, Y = $12,000 billion, T = 75 degrees, PL = $6, and PK = 12.5%.
B.	Calculate the equilibrium price and output.

Answer 1

Substitute the values in the variables and find the demand and supply equations

QD =  4,500,000 - 1,200,000P + 2,000,000P_S + 1,500Y + 100,000T

= 4500000-1200000P+2000000*5+1500*12000+100000*75

= 40,000,000 - 1,200,000P

QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000P_K - 120,000T

= 8000000+2400000P-500000*6-80000*12.5-120000*75

= 2,400,000P - 5,000,000

Equilibrium occurs where QS = QD

2,400,000P - 5,000,000 = 40,000,000 - 1,200,000P

3,600,000P = 45,000,000

P = 12.5 and Q = 25,000,000

These are the equilibrium price and output.