Now suppose that the annual demand for glue is QD = 80 - 2P. The annual supply o

Question

Now suppose that the annual demand for glue is QD = 80 - 2P. The annual supply of glue is QS = 20 - 4w + 2P, where w is the price of horse hooves. All quantities are in thousands, and prices are in dollars. The rise in horse-slaughtering eventually causes the price of horse hooves to fall from $10 to $5. Find the change (using positive numbers for an increase and negative numbers for a decrease) in glue's equilibrium price

During the European mad-cow scare of 2001, The Wall Street Journal ran an article detailing an increased interest in horse-meat, especially in France. (I do not make this stuff up.) For what follows, you should assume that all horse parts are used once a horse is killed.

Explanation / Answer

Annual demand for glue is QD = 80 - 2P. The annual supply of glue is QS = 20 - 4*10 + 2P or QS = 2P - 20 when w is 10 and QS = 20 - 4*5 + 2P or QS = 2P when w is 5.

Equilibrium price of glue when w is 10 is given by QD = QS

80 - 2P = 2P - 20

100 = 4P or P = $25 per unit

Equilibrium price of glue when w is 5 is given by QD = QS

80 - 2P = 2P

80 = 4P or P = $20 per unit

Hence the change in equilibrium price of glue is from $25 to $20 per unit.

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