Question

1 (a) Graph the following market demand function Q = 300 – 25P, plotting P (prices) on the vertical axis, and Q (quantity), on the horizontal axis. Next, show how much quantity demanded changes when the price of the good given by this demand function increases from $5 to $7? (2 pts)

(b) Consider that the demand curve in part (a) above represents the market demand for a steak burger meal in a local area. This local area has three fast food restaurants that exclusively produce these meals, and they are owned by Sam, Sony, and Sheila. Their supply curves for a steak burger meal are given as follows: Sam’s Eatery Sony’s Hot Meals Sheila’s “To Go” Price ($) Quantity Price ($) Quantity Price ($) Quantity 2.50 0 2.50 5 2.50 5 5.00 15 5.00 20 5 15 8.00 28 8.00 42 8.00 30 10.00 35 10.00 50 10.00 40 12.50 55 12.50 75 12.50 60 15.00 80 15.00 100 15.00 80 Derive and carefully draw the market supply curve for steak burger meals. Also redraw the market demand (from part a), within the same plane. (2 pts) What is the equilibrium price and equilibrium quantity? (2 pt.)

(c) Assume that these fast food restaurants are now facing higher prices on the ingredients needed to produce their steak burger meals, and about the same time households in that area are finding it increasingly necessary to have their adult members work full time with overtime hours. How would these events and changes in this locality influence the computed equilibrium price and quantities for steak burger meals? (Both provide graph sketches and written intuitive explanations for your answer) (2 pts)

Answer 1

A. The following is the graph.

When P=5, Q=300-25*5 OR Q=175.

When P=7, Q=300-25*7 OR Q=125.

Hence the quantity drops by 50 units. On the graph, it looks like-

b. The market supply curve will be derived from the sum of supplies of all three. The data wasnt completely properly pasted in the question, so I assumed that it looked like this (please comment if the data is not right)-

On the basis of this data, the tota supply of the market is this-

and drawing it on the graph, it turns out to be-

It is clear that the supply and demand graphs intersect at point Z. At Z, Price is 10.88 and Quantity is 28. This is the equilibrium price and quantity.

C. Since the restaurants are facing higher input prices, they would charge more for the same quantity of food as earlier. This means the supply curve will become steeper.

The members of the households are working overtime, which means more disposable income. Assuming that their utility for the goods remain same, that means more money for Burgers. This means the demand curve will become less elastic, or sharper.

I have shown both the supply curve and demand curve in dashed lines in the graph below-