Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 26

Suppose that the demand function for wheat is Q D = 1.1 -.25P +.1 I , where P = the price of wheat and I = per capita income. The supply function for wheat is Q S = 4.3 +.5P -.04 P o , where P o = the price of oil. Currently, I = 20 and P o = 50.
a. Plot the supply curve and demand curve on the standard supply and demand graph.
b. Find the equilibrium price and quantity and depict it on your graph.
c. Calculate the resulting consumer surplus and producer surplus.
d. What would happen to the equilibrium price and quantity if income were to increase (holding other factors constant) Give a brief economic explanation for why this would occur.
e. What would happen to the equilibrium price and quantity if the price of oil were to increase (holding other factors constant) Give a brief economic explanation for why this would occur.
f. What would happen to the equilibrium price and quantity if income and the price of oil were both to increase at the same time Give a brief economic explanation for why this would occur.