March 29, 2017

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Assume that the equation for demand for bread at a small bakery is Qd = 60 - 10Pb + 3Y, where Qd is the quantity of bread demanded in loaves, Pb is the price of bread in dollars per loaf, and Y is the average income in the town in thousands of dollars. Assume also that the equation for supply of bread is Qs = 30 + 20Pb - 30 Pf, where Qs is the quantity supplied and Pf is the price of flour in dollars per pound. Assume finally that markets clear, so that Qd = Qs.

a. If Y is 10 and Pf is $1, solve mathematically for equilibrium Q and Pb. (Hint: substitute all exogenous variables into the equations and set Qd = Qs to find equilibrium Pb first and then subsitute back equilibrium Pb to the equations fo find equilibrium Q)
b. If the average income in the town increases to 15, solve for the new equilibrium Q and Pb.

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