Suppose that demand and supply for cookies can be written as:
Q^d = 50 - P; Q^s = P. Compute the equilibrium price and quantity. Now, suppose that a change in the price of cake causes demand for cookies to become:
Q^d = 100 - P. Compute the new equilibrium price and quantity. What has changed?

Question

Quizplus · Accepted Answer

Set demand equal to supply to get the equilibrium price and quantity in the two cases. Now, graph the problem. When demand shifts out, equilibrium price and quantity must rise (except if the $\bold{\text{Supply Curve}}$ is perfectly inelastic (i.e., vertical), in which case only the equilibrium price would increase, but the equilibrium quantity would remain unchanged.). You can check that you have computed the equilibrium correctly by checking that the price and quantity you obtain satisfy both the demand and the supply equations.

Suppose That Demand and Supply for Cookies Can Be Written