Question

Suppose a market’s demand and supply curves take on the following characteristics:

QD = 100 – 2.9(P) + 0.93(Y – T)

QS = 2(P)

where:

QD quantity demanded

QS quantity supplied

P price of the commodity

Y personal income

T personal taxes  

Given the above model, please answer the following questions:

1. What is the market-clearing price and quantity if personal taxes (T) equal zero and personal income (Y) is $400?

4. If we added the real wealth term “+0.01(W)” to the demand equation, how much would your answer change in question 1 (price and quantity) if the level of real wealth was $3,000 (i.e., W = 3,000)? Draw a graph depicting the effects this has upon market equilibrium compared to your answer to part 1

Answer 1

QD = 100 – 2.9(P) + 0.93(Y – T)

QS = 2(P)

1) T (tax) = 0 & Y= income= 400

so, QD =QS

therefore,  100 – 2.9(P) + 0.93(Y – T) = 2(P)

100- 2.9 P + .93* 400 = 2P (solve this)

P= 96.32 (ANSWER)

4) A new term has to be added that is .01 W.

So, new equlibrium is  

100 – 2.9(P) + 0.93(Y – T) + .01W =2P. (where W= 3000)

100- 2.9P + .93*(400-0) +.01*3000 = 2P (solve this)

P = 102.44 (Answer)

Due to weath the QD line shifts upward where as QS line is still the same , hence the price increase from 96.32 to 102.44. (Image is not uploaded due to technical gliches)