Suppose that the demand curve for a product is given by Q=300–2P+4I,

where I is the average income in thousands of dollars. The supply curve is Q=3P–50.

a) Find the price and quantity of the product that clears the market.

assuming that I=25.

Inserting I=25 into the demand function:

Q=300–2P+4I

Q=300–2P+100

Q=400–2P

Equating supply and demand and solving for the price:

400–2P = 3P–50

5P = 450

P = 90

Inserting the price into the demand or supply function we obtain the equilibrium quantity:

Q=400–2P

Q=400–180

Q = 220

b) Find the price and quantity of the product that clears the market assuming that I=50.

Inserting I=50 into the demand function:

Q=300–2P+4I

Q=300–2P+200

Q=500–2P

Equating supply and demand and solving for the price:

500–2P = 3P–50

5P = 550

P = 110

Inserting the price into the demand or supply function we obtain the

equilibrium quantity:

Q=500–2P

Q=500–220
Q = 280

250
200
Y
e
110
90
d D'
220 280 400 500 Q