Question

1. Suppose you own a local restaurant chain that sells through brick & mortar locations and also offers take-out and characterized by the following demand and supply curves

Qd = 3,0000,000 – 600P + 200M

Qs = 1,000,000 + 400P

1. Assume M=15,000. Find the market price and quantity for your firm.

2. Assume COVID hits and since consumers are reluctant to leave their homes and dine-in but still buy take-out, the demand changes to

Qd = 2,000,000 – 600P + 200M; M=15,000

Find the market price and quantity for your firm.

3. Building on the situation in b, suppose the Governor forces you to close your dine-in facilities and supply changes to

Qs = 400P

Find the market price and quantity for your firm.

4. Building on the situations in band c, suppose a recession develops and reduces income by 1/3, which now cuts into your take-out sales.

Find the market price and quantity for your firm.

Explain what is happening to the prospects for your firm.

Answer 1

A) QD = 30000000-600P+200*15000 = 1000000+400P

= 30000000+3000000-1000000 = 400P+600P

P = 32000000/1000

= 32000

Q = 1000000+400*32000

= 13800000

B) 2,000,000 – 600P + 200*15000 = 1000000+400P

2000000+3000000-1000000 = 1000P

P = 4000000/1000 = 4000

Q = 1000000+400*4000 = 2600000

C) 2,000,000 – 600P + 200*15000 = 400P

5000000 = 1000P

P = 5000000/1000 = 5000

Q = 400*5000 = 2000000

D) New income = 15000*1/3 = 5000

2,000,000 – 600P + 200*5000 = 400P

3000000 = 1000P

P= 3000000/1000 = 3000

Q = 400*3000 = 1200000

As seen, when the price increases, the quantity decreases and when price decreases the quantity increases and when income decreases, the quantity decreases which shows that the good is normal good