Answer to Question #194221 in Microeconomics for Gloria Tupai

Question

Suppose that the quantity of corn supplied depends on the price of corn (P) and the amount of rainfall (R). The demand for corn depends on the price of corn and the level of disposable income (I). The equations describing the supply and demand relationships are Q^s = 20R + 100P and Q^d = 4000 − 100P + 10I.

a)     Sketch a graph of demand and supply curves (1 marks)

Answer 1

Solution:

a.). An increase in rainfall will increase the supply of corn, lowering the equilibrium price and increasing the equilibrium quantity. This is because both Rainfall (R) and Price (P) are positively related to the supply of corn. Therefore, this means that, if the rainfall or the price of corn increases, then the supply of corn would also increase. Note that, if there is a change in the price of corn, the supply curve will not shift but a change in rainfall will shift the supply curve of corn either left or right.

This is depicted in the below graph, where an increase in rainfall will shift the supply curve to the right and the equilibrium price will fall from P₀ to P₁, while the equilibrium quantity will increase from Q₀ to Q₁.