Suppose that the demand and supply curves for green tea are stated functionally as Q D = 700 - P and Q S = 400 + 2P. Suppose also that a study is released proving that the regular consumption of green tea prolongs life by at least a decade, and the result is that the quantity demanded of green tea doubles at the initial price. The equilibrium price in this case will increase by

Question

Quizplus · Accepted Answer

Initially, the demand curve is QS1U1B1DS1U1B0S1U1B1 = 700 - P and the supply curve is QS1U1B1SS1U1B0S1U1B1 = 400 + 2P. Equilibrium is reached when quantity demanded equals quantity supplied, i.e. QS1U1B1DS1U1B0S1U1B1 = QS1U1B1SS1U1B0S1U1B1. Solving for P, we get P = 150.

After the study is released, with the price still at P=150, the quantity demanded doubles from 700 - 150 = 550 to 2(550) = 1100. This creates excess demand in the market, which will cause the price to rise. As the price rises, the quantity demanded will decrease and the quantity supplied will increase, until a new equilibrium is reached.

To find the new equilibrium price, we can set the new quantity demanded (1100) equal to the original quantity supplied (400 + 2P). Solving for P, we get P = 350. Therefore, the new equilibrium price is $350.

The percent increase in price is (350-150)/150 * 100% = 133.3%, which is closest to answer C) 200%.

Suppose That the Demand and Supply Curves for Green Tea