Answer to Question #192401 in Microeconomics for kavita

Question

Suppose that the quantity of corn supplied depends on the price of corn (P) and the amount of rainfall (R). The demand for corn depends on the price of corn and the level of disposable income (I). The equations describing the supply and demand relationships are Q^s = 20R + 100P and Q^d = 4000 − 100P + 10I.

a)     Sketch a graph of demand and supply curves

b)     Sketch a graph that shows the effect of an increase in rainfall on the equilibrium price and quantity of corn.

c)     Sketch a graph of demand and supply curves that shows the effect of a decrease in disposable income on the equilibrium price and quantity of corn.

Answer 1

(a)

Equilibrium is at point E.

The equilibrium price of corn is P.

The equilibrium quantity of corn is Q.

(b)

Q^s = 20R + 100P

In the above supply function we see that rainfall and quantity supplied are positively related. Thus increase in rainfall would increase supply. 

Thus the supply curve shifts to the right from S to S'.

Equilibrium shifts from E to E'.

The equilibrium price of corn decreases from P to P'.

The equilibrium quantity of corn increases from Q to Q'

(c)

Q^d = 4000 − 100P + 10I

In the above, demand function we see that disposable income and quantity demanded are positively related. Thus decrease in disposable income would result in a decrease in demand. 

Thus the demand curve shifts to the left from D to D'.

Equilibrium shifts from E to E''.

The equilibrium price of corn decreases from P to P''.

The equilibrium quantity of corn decreases from Q to Q''