Anasarias, Kimberly Shane B.

2019-02176
BS in Management III
Econ 102 – C
Problem Set 2

Instructions: Write your answers on a sheet of yellow pad or type your answers in a Word
document.

1. Consider the market for butter. The demand curve is given by Qd = 300 − 2P + 4I, where I is the
average income. The supply curve is Qs =3P − 25PM − 25, where PM is the price of milk.

(a) If the average income in Cambridge, is I = 25 and the price of milk is PM = 1, what is the market
clearing price and quantity in Cambridge?
Answer:
Qd = 300 − 2P + 4I Qs =3P − 25PM – 25
Qd = 300 − 2P + 4(25) Qs =3P – 25(1) – 25
Qd = 300 − 2P + 100 Qs =3P − 25 – 25
Qd = 400 − 2P Qs =3P – 50

Qd = Qs
400 – 2P = 3P – 50
450 = 5P
5
P = 90 The market clearing price is 90 and the quantity
demanded is 220 in Cambridge, at an average income
of 25 and with the price of milk at 1.
Qd = 300 – 2P + 4I
Qd = 300 – 2(90) + 4(25)
Qd = 300 – 180 + 100
Qd = 220
Anasarias, Kimberly Shane B.
2019-02176
BS in Management III
Econ 102 – C
Problem Set 2

(b) Suppose that bad weather conditions raise the price of milk to PM = 2. Find the new equilibrium
price and quantity of butter in Cambridge. (Draw a graph to illustrate your answer).
Answer:
Qd = 300 − 2P + 4I Qs =3P − 25PM – 25
Qd = 300 − 2P + 4(25) Qs =3P – 25(2) – 25
Qd = 300 − 2P + 100 Qs =3P − 50 – 25
Qd = 400 − 2P Qs =3P – 75

Qd = Qs
400 – 2P = 3P – 75
470 = 5P
5
P = 94 The market clearing price is 94 and the quantity
demanded is 212 in Cambridge, at an average income
of 25 and with the price of milk at 2.
Qd = 300 – 2P + 4I
Qd = 300 – 2(94) + 4(25)
Qd = 300 – 188 + 100
Qd = 212 S2 S1
100
P2
P1 90
80
D1
60
D2
40
20 Q1
Q2
0
50 100 150 200 250
Anasarias, Kimberly Shane B.
2019-02176
BS in Management III
Econ 102 – C
Problem Set 2

(c) If the average income in Beverly Hills, is I = 50, what is the market clearing price and quantity
in Beverly Hills when PM = 1? Compare your results with the ones you have obtained in (a).
Answer:
Qd = 300 − 2P + 4I Qs =3P − 25PM – 25
Qd = 300 − 2P + 4(50) Qs =3P – 25(1) – 25
Qd = 300 − 2P + 200 Qs =3P − 25 – 25
Qd = 500 − 2P Qs =3P – 50

Qd = Qs
500 – 2P = 3P – 50
550 = 5P
5
P = 110 The market clearing price is 110 and the quantity
demanded is 180 in Beverly Hills, at an average income
of 50 and with the price of milk at 1.
Qd = 300 – 2P + 4I
Qd = 300 – 2(110) + 4(25)
Qd = 300 – 220 + 100
Qd = 180

Cambridge Beverly Hills

Market Clearing Price 90 110
Quantity Demanded 220 180

As a result of a higher market clearing price in Beverly Hills as compared to Cambridge, the
quantity demanded for the same product which is milk is relatively lower in Beverly Hills.
Anasarias, Kimberly Shane B.
2019-02176
BS in Management III
Econ 102 – C
Problem Set 2

2. Suppose the market demand and market supply for apartments in a city are given by the
following functions:
Qd = 5000 - 3p
Qs = 1000 + p

(a) At what price does the market for apartments in the city clear? How many apartments are
rented at this price?
Answer:
Qd = Qs
5000 – 3p = 1000 + p
4000 = 4p
The market clearing price of the apartments in the city
4
is 1000. Meanwhile, 2000 apartments are rented out at
1000 = p this price.

Qd = 5000 – 3p
Qd = 5000 – 3(1000)
Qd = 5000 – 3000
Qd = 2000

(b) Suppose the city sets a maximum rent at $1200. Illustrate the rent control in a supply and
demand diagram. Is there a shortage? If so, what is the excess demand?
Answer:
Qd = 5000 – 3p Qs = 1000 + p

Qd = 5000 – 3(1200) Qs = 1000 + 1200

Qd = 5000 – 3600 Qs = 2200

Qd = 1400 Qd Qs

1,200

There is a surplus of 800 apartments in the city with a

rent control of $1200. This is because only 1,400
apartments are demanded.

1,400 2,200
Anasarias, Kimberly Shane B.
2019-02176
BS in Management III
Econ 102 – C
Problem Set 2

3. Consider the market for apple juice. In this market, the supply curve is given by QS = 10PJ − 5PA
and the demand curve is given by QD = 100 − 15PJ + 10PT, where J denotes apple juice, A
denotes apples, and T denotes tea.
(a) Assume that PA is fixed at $1 and PT = 5. Calculate the equilibrium price and quantity in
the apple juice market.
Answer:
QD = 100 – 15PJ + 10PT QS = 10PJ – 5PA
QD = 100 – 15PJ + 10(5) QS = 10PJ – 5(1)
QD = 100 – 15PJ + 50 QS = 10PJ – 5
QD = 150 – 15PJ

QD=QS
150 -15PJ = 10PJ – 5
155 = 25PJ
25
Assuming that PA is fixed at $1 and PT is 5, the
6.2 = PJ equilibrium price for apple juice is 6.2 and there is a
total of 57 apple juice in the market.
QD = 100 – 15PJ + 10PT
QD = 100 – 15(6.2) + 10(5)
QD = 100 – 93 + 50
QD = 57

(b) Suppose that a poor harvest season raises the price of apples to PA = 2. Find the new
equilibrium price and quantity of apple juice. Draw a graph to illustrate your answer.

Answer:
QD = 100 – 15PJ + 10PT QS = 10PJ – 5PA
QD = 100 – 15PJ + 10(5) QS = 10PJ – 5(2)
QD = 100 – 15PJ + 50 QS = 10PJ – 10
QD = 150 – 15PJ D2 D1 S2 S1
QD=QS
150 -15PJ = 10PJ – 10 P2 6.4
160 = 25PJ
25
6.4 = PJ
6.2 P1
QD = 100 – 15PJ + 10PT
Q2
QD = 100 – 15(6.4) + 10(5) Q1
QD = 100 – 96 + 50
QD = 54 54 57

Supposing that the price of apple juice increased to $2,

the equilibrium price for apple juice is 6.4 and there is
a total of 54 apple juice in the market.