A: Assume that the supply of ice cream is represented by S₁ as shown in the figure. The initial equilibrium is given at price P₁. The unusually hot weather causes the demand curve for ice cream to shift from D₁ to D₂. This shift creates short-run excess demand, meaning a temporary shortage, at price P₁. Ice cream sellers start raising the price of ice cream to close the shortage gap. The price of ice cream will continue rising until the quantity demanded and the quantity supplied are equal. This will be true at price P₂ in the figure.

Butter and margarine are considered substitute goods. Therefore, a rise in the price of margarine will cause people to raise their consumption of butter. In the figure, the demand curve for butter shifts from D₁ to D₂. This shift in demand leads to the equilibrium price of butter to increase from P₁ to P₂ and the equilibrium quantity to increase from Q₁ to Q₂.

 

Milk is the main input in butter production. A rise in the price of milk increases the cost of butter production. Higher costs reduce the supply of butter. As a result, the supply curve for butter shifts from S₁ to S₂ in the figure. This shift leads to a higher equilibrium price at P₂ and a lower equilibrium quantity at Q₂ for butter.

 

Assume that butter is a normal good. This means that as income increases, the demand for butter increases as well. A decrease in income will lead to the demand curve for butter to decrease and shift from D₁ to D₂. As a result, the equilibrium price declines from P₁ to P₂, and the equilibrium quantity declines from Q₁ to Q₂.

 

• When income (I) is 25, the demand curve becomes $Q=300-2P+4\left(25\right)=400-2P$.

• To find the equilibrium price and quantity, set demand equal to supply and solve the equation for P and then Q:

  • $400-2P=3P-50$. Solve this for P: P = $90

• Plug in P and solve the demand or supply equation for Q:

  • $Q=400-2\left(90\right)=220$.

• When income (I) is 50, the demand curve becomes $Q=300-2P+4\left(50\right)=500-2P.$

• To find the equilibrium price and quantity, set demand equal to supply, and solve the equation for P and then Q:

  • $500-2P=3P-50$. Solve this for P: P = $110

• Plug in P and solve the demand or supply equation for Q:

  • $Q=500-2\left(110\right)=280$.

Assume that in the figure D₁ represents the demand curve for Part A calculations, and D₂ represents the demand curve for Part B calculations.

• When Brazil and Indonesia add 200 million bushels of wheat to U.S. wheat demand, the new demand curve will increase by 200 and will be Q + 200. In this case, the new demand equation will be:

$$Q_{\mathrm{D}} = (3,244 - 283P) + 200 = 3,444 - 283P$$

• To find the new equilibrium price, equate supply and the new demand:

$$1,944 + 207P = 3,444 - 283P$$

Solve this equation for P:

P = $3.06 per bushel.

To find the equilibrium quantity, plug the price into either the supply or demand equation. If we use the demand equation:

$Q_{\mathrm{D}} = 3,444 - 283(3.06) = 2,578 \text{million bushels is the equilibrium quantity.}$