Suppose that demand and supply in the market for brazil nuts is linear,with a historic market price of $.50 per pound and 10 million pounds sold.In 2004,a news item raised health fears about the nuts.That year,the market price fell to $.45 per pound and only 8 million pounds traded.An estimate for the equation of brazil nuts would be:

Question

Quizplus · Accepted Answer

Since we have information on both the price and quantity demanded/supplied before and after the news item, we can use the midpoint method to estimate the equation.

Using the midpoint method, we get:

Price midpoint: (0.50 + 0.45)/2 = 0.475
Quantity midpoint: (10 + 8)/2 = 9

Slope of demand: (8-10)/(0.45-0.50) = 40
Intercept of demand: 10 - 40*(0.50) = -10

Hence, the demand equation is:

Qd = -10 + 40*P

Since we also know the quantity supplied at the historic price, we can use this to estimate the supply equation.

Qs = 10

Using the equilibrium condition Qs = Qd, we get:

10 = -10 + 40*P
P = 0.5

So the supply equation is:

Qs = 10

Putting this together, we get:

Q = -10 + 40*P if P >= 0.5 
Q = 10 if P < 0.5

Simplifying, we get:

Q = -10 + 40*P for all P

Suppose That Demand and Supply in the Market for Brazil