Question

Assume that the supply and demand curves in a market are described by the following equations. Supply: P = 5+5 · QS Demand: P = 86

1. Graph the supply and demand curves in this market. Be sure to put the quantity (Q) on the horizontal axis and the price (P) on the vertical axis. You may use quantities four (Q = 4) through twenty (Q = 15) by units of one (1) for your graph.

2. What is the quantity supplied (QS) at P = $35?

3. What is the surplus or shortage when P = $70?

4. What is the price and quantity equilibrium (Pe and Qe) in this market?

Assume that you have a budget of $30 to spend on milk and cereal only. The price of milk is PM = $5 and the price of cereal is PC = $3.50.

1. Graph the budget constraint. Be sure to put the quantity of milk (QM) on the horizontal axis.

2. What is the most you can purchase of cereal?

3. If you purchase 3 units of milk (QM = 3), then how many units of cereal can you purchase at most?

4. What is the slope of the budget constraint? (Note: it is important that you answer Question 2.1 correctly and put QM on the horizontal axis.)

5. What is the opportunity cost of 1 unit of cereal?