Question

In Smalltown, Pennsylvania, the demand function for men’s haircuts is Qd=500−30p+0.08Y, where Qd is quantity demanded per month, p the price of a haircut, and Y the average monthly income in the town. The supply function for men’s haircuts is QS=100+20p−20w, where Qs is the quantity supplied and w the average hourly wage of barbers. If Y=5000 and w=10, use Excel to calculate quantity demanded and quantity supplied for p=5,10,15,20,25,30. Calculate the excess demand for each price (Note that an excess supply is negative excess demand.) Determine the equilibrium price and quantity. Use Excels charting tool to draw the demand and supply curves. Assume that Y increases to 6875 and and w increases to 15. Use Excel to recalculate quantity demanded for p=5,10,15,20,25,30. Determine the new equilibrium price and quantity. Use Excel to draw the new demand and supply curves. how can you explain the change in equilibrium?

Answer 1

For prices 0 to 30, and keeping the income Y fixed at 5000 and w fixed at 10, the table below shows the quantity demanded and supplied along with excess demand and supply

Price	Quantity demanded	Quantity supplied	Excess demand / supply
0	900	-100	1000
5	750	0	750
10	600	100	500
15	450	200	250
20	300	300	0
25	150	400	-250
30	0	500	-500

The equilibrium price is 20 and quantity is 300.

With new income Y = 6875 and w = 15, the new schedule is shown below

Price	Demand	Supply	Excess demand / supply
0	1050	-200	1250
5	900	-100	1000
10	750	0	750
15	600	100	500
20	450	200	250
25	300	300	0
30	150	400	-250

The equilibrium price is 25 and quantity is 300.

This can be explained because the rise in income will shift the demand to the right and rise in wage will shift the supply to the left. Both these effects will bring equal size shifts so that quantity is unchanged but the price has increased.