Question

The 2020 demand and supply equations for Ontario grapes are as follows:

P = $100 - Q_d^Can                                                          (1)

P = $10 + Q_s^Can                                                         (2)

As a result of a recent visit by Pottsville’s High Commissioner to this week’s virtual Grape and Wine Festival, the Republic of Pottsville has agreed to buy Ontario grapes. Its demand is given as follows:

P = 80-2Q_d^Pottsville                                                                             (10)

                                                What are the economic effects of this new demand?

Original price (1 mark)                    Original output (1 mark)      

New price      ___________ (2 mark)                     New output _____________(2 mark)      

Consumption by Canadians_______ (2 mark)       By Pottsvillians____________(2 mark)      

Answer 1

Solution — Initial demand, P = 100—Qd or, Qd=100—P Initial supply , P= 10+Q or, Qs =—10+P

So at the initial (original) equilibrium Qd=Qs or , 100—P=—10+P or, 2P= 110 , P= 55 ( original equilibrium price)

Putting equilibrium price in the demand or supply function we get Q =—10+55 = 45 ( original equilibrium quantity)

Now, a new market segment is added with demand function P = 80 —2Q' or 2Q=80—P or, Q'=40—0.5P

New total market demand = initial demand +new demand Q= (Q1+Q2)= 100—P + 40—0.5P = 140—1.5P

So, at the new equilibrium Qd' = Qs or, 140—1.5P= —10+P or , 2.5P=150 , or P =60 ( new equilibrium price)

Put this new equilibrium price in the either new demand or supply function Q =—10+60 = 50 ( new equilibrium quantity)

Now , consumption by Canadian ,Q =:100—P =100—60= 40 , by pottsvillians Q = 40—0.5P = 40—0.5×60= 10