Question: Problem 4

The widget industry in Springfield is competitive, with numerous buyers and sellers.
Consumers don't differentiate among the various brands of widgets (no product differentiation).

The industry demand curve is given by:

Qd = 998 – 5Pw + 4 Y – 6Pg

And the industry supply curve is given by

Qs = +15Pw – 3 Wage

Where Pw represents the price of widgets, Pg is the price of gasoline, Y is disposable personal
income in Springfield, and Wage is wages paid to workers in widget factories.

Currently, Y= $10, Pg = $3, and Wage = $20.

a. Explain the meaning of the coefficients for each of the terms in the right hand side of the supply and
demand equations. Identify what the sign of each term indicates in terms of analyzing the equations.

b. Find the market equilibrium price and quantity using the information above.

c. Suppose Springfield’s economy moves into a recession and Y falls to $9 and rising unemployment
allows widget makers to reduce wages to $18 per hour. What happens to the supply and demand curves?
What can you predict will happen to equilibrium price and quantity?

d. Calculate the new equilibrium price and quantity.