Mansoura University

Faculty of Engineering
Mechanical Power Engineering
Dept.

Solution Of EX. Supply and

Demand

Done By:
1) Aya Morad El Metwally P (2,3)
2) Ahmed Abdelhamid Sleem P (4,9)
3) Ayman Saad El-Nady P (5,6,7,8)
4) Reman Mohamed Komeha P (2,3, Mid)
5) Mustafa Mahmoud Shebl P (1,10,11)

Under supervision:
Dr: Moustafa El-Bouz

April 2024
Problem 1:

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

where I is average income measured in thousands of dollars. The supply
curve is Q = 3P − 50.
a) If I = 25, find the market-clearing price and quantity for the product.
b) If I = 50, find the market-clearing price and quantity for the product.
c) Draw a graph to illustrate your answers.
Solution:
a) Qs = Qd at I= 25
300-2p+4*25= 3p-50
Clearing price p = 90 $
Quantity after substitution at Qs or Qd = 220

b) Qs = Qd at I= 50
300-2p+4*50= 3p-50
Clearing price p = 110 $
Quantity after substitution at Qs or Qd = 280

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Problem 2:

Consider a competitive market for which the quantities demanded and

supplied (per year) at various prices are given as follows:

PRICE DEMAND SUPPLY

(DOLLARS) (MILLIONS) (MILLIONS)
60 22 14
80 20 16
100 18 18
120 16 20

a) Calculate the price elasticity of demand when the price is $80 and
when the price is $100.
b) Calculate the price elasticity of supply when the price is $80 and
when the price is $100.
c) What are the equilibrium price and quantity?
d) Suppose the government sets a price ceiling of $80. Will there be a
shortage, and if so, how large will it be?
Solution:
a) The price elasticity when the price = 80$

The price elasticity when the price = 100$

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b) The price elasticity of supply when price = 80$

The price elasticity of supply when price =100 $

c) The equilibrium price and quantity are where demand equals the
supply.
So, equilibrium prices are $100, and the equilibrium quantity is 18
million.
d) There will be a shortage, because demanded quantity of 80$ is 20
million, and supply quantity is 16 million.
Shortage of supply will be 4 million.

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Problem 3:

Refer to Example 2.5 on the market for wheat. At the end of 1998, both
Brazil and Indonesia opened their wheat markets to U.S. farmers.
Suppose that these new markets add 200 million bushels to U.S. wheat
demand. What will be the free market price of wheat and what quantity
will be produced and sold by U.S. farmers?
Solution:

Old: Qd = 3550 - 266P, Qs = 1800 + 240P

New: Qd = 3550 +200 – 266P = 3750 – 266P, Qs = 1800 + 240P
Free market price of wheat:
Qd = Qs
3750 - 266P = 1800 + 240P
506P = 1950
P = 3.85$
The quantity will be produced and sold by U.S. farmers:
Qs = 3750 - 266P
Qs = 3750 - 266(3.85)
Qs = 3750 – 1024.1
Qs = 2726 million.

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Problem (2):

Consider a competitive market for which the quantities demanded and

supplied (per year) at various prices are given as follows:
Price (Dollars) Demand (Millions) Supply (Millions)
60 22 14
80 20 16
100 18 18
120 16 20
a) Calculate the price elasticity of demand when the price is $80 and
when the price is $100.
b) Calculate the price elasticity of supply when the price is $80 and
when the price is $100.
c) What are the equilibrium price and quantity?
d) Suppose the government sets a price ceiling of $80.
Will there be a shortage, and if so, how large will it be?
Solution:
a) The price elasticity of demand when the price is $80:
QD = 20 - 22 = -2
P = 80 - 60 = 20
ED = = = -0.4

The price elasticity of demand when the price is $100:

QD = 18 - 20 = -2
P = 100 - 80 = 20
ED = = = -0.556

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b) The price elasticity of supply when the price is $80:
QS = 16 - 14 = 2
P = 80 - 60 = 20
ES = = = 0.5

The price elasticity of supply when the price is $100:

QS = 18 - 16 = 2
P = 100 - 80 = 20
ES = = = 0.556

c) The equilibrium price and quantity:

QD = QS
So, ❖The equilibrium price = $100.
❖The equilibrium quantity = 18 million.

d) There will be a shortage.

Because the demand quantity = 20 million
and the supply quantity = 16 million
The Shortage = Demand Quantity – Supply Quantity
= 20 – 16 = 4 million

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Problem (3):

Refer to Example 2.5 on the market for wheat. At the end of 1998, both
Brazil and Indonesia opened their wheat markets to U.S. farmers.
Suppose that these new markets add 200 million bushels to U.S. wheat
demand. What will be the free-market price of wheat and what
quantity will be produced and sold by U.S. farmers?
Solution:
❖The demand quantity before 1998 (QD (old)) = 3550 – 266 P
❖ The demand quantity after 1998 (QD (new)) = 3550 – 266 P +200
= 3750 – 266 P
❖ The supply quantity (QS) = 1800 + 240 P
The free-market price of wheat:
QD (new) = QS
3750 – 266 P = 1800 + 240 P
(240 + 266) P = 3750 -1800
506 P = 1950
P = $3.85
The quantity will be produced and sold by U.S. farmers:
QS = 1800 + 240 P
QS = 1800 + 240 (3.85)
QS = 1800 + 924
QS = 2724 million

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Problem 4

A vegetable fiber is traded in a competitive world market, and the world

price is $9 per pound. Unlimited quantities are available for import into
the United States at this price. The U.S. domestic supply and demand for
various price levels are shown as
U.S. U.S.
follows:
PRICE SUPPLY DEMAND
a) What is the equation for demand?
(MILLION (MILLION
What is the equation for supply?
LBS) LBS)
b) At a price of $9, what is the price 3 2 34
elasticity of demand? What is it at a 6 4 28
price of $12? 9 6 22
c) What is the price elasticity of supply 12 8 16
at $9? At $12? 15 10 10
d) In a free market, what will be the 18 12 4
U.S. price and level of fiber imports?
Solution
a) Equation of demand:
QD = a + bp, at P = 3 QD = 34, and at P = 6 QD = 28
By substituting of two point in the
equation
34 = a + 3b……… (1) 28 = a +
6b……… (2)
Subtract equation (2) from equation
(1)
34 - 28 = a - a + 3b - 6b 6 = - 3b
b=-2
Substitute by b = - 2 in equation (1)
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34 = a + 3 * - 2 a = 40 QD = 40 - 2P.
Equation of supply
QS = a + bP, at P = 3 QS = 2, and at P = 6 QS = 4
By substituting of two point in the equation
2 = a + 3b………. (3) 4 = a + 6b………. (4)
Subtract equation (3) from equation (4)
4 - 2 = a - a + 6b - 3b 2 = 3b b=
Substitute by b = in equation (3)
2=a+3* 2=a+2 a=0
QS =

b) price elasticity of demand

∆QD = 28 - 34 = - 6, ∆P = 6 - 3 = 3
ED =

At P = 9 QD = 22………. ED = - 2 = - 0.8182
At P = 12 QD = 16……….ED = - 2*
c) price elasticity of supply
∆QS = 4 - 2 = 2, ∆P = 6 - 3 = 3
ED =

At P = 9 QS = 6………. ES = =1
At P = 12 QS = 8……. ES = =1
d) price and level of fiber imports
the price in the United States will be the same as the world price, so P =
9$. At p = 9$ the Quantity supplied is 6 and the quantity demanded is 22
so import will be the difference between Quantity supplied and quantity
demand = 22 - 6 = 16 million LBS
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Problem 5

Much of the demand for U.S. agricultural output has come from other
countries. In 1998, the total demand for wheat was QDT = 3244 − 283P.
Of this, total domestic demand was QDD = 1700 − 107P, and domestic
supply was QS = 1944 + 207P. Suppose the export demand for wheat
falls by 40 percent.
a) U.S. farmers are concerned about this drop in export demand. What
happens to the free-market price of wheat in the United States? Do
farmers have much reason to worry?
b) Now suppose the U.S. government wants to buy enough wheat to
raise the price to $3.50 per bushel. With the drop in export demand, how
much wheat would the government have to buy? How much would this
cost the government?
Solution
QDT : Total Demand QDD : Domestic Demand
QS : Domestic Supply QEX : Export Demand (QDT - QDD)
a)
State 1:
To get the Free market price & Quantity ( QDT = QS)
3244 – 283P = 1944 + 207P P = 2.65306 $ Q = 2493.184 B
Total Revenue = P * Q = 2.65306 * 2493.184 = 6614.5667 $
State 2:
QEX (new) = 0.6 * QEX (old) = 0.6 * (3244 − 283P − 1944 − 207P )
QEX (new) = 926.4 – 105.6P
QDT (new) = QEX (new) + QDD = 926.4 – 105.6P + 1700 - 107P
QDT (new) = 2626.4 – 212.6P
To get the new Free market price & Quantity ( QDT (new) = QS) :
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2626.4 – 212.6P = 1944 + 207P
P = 1.63 $ Q = 2280.64 B
Total Revenue = P * Q = 1.63 * 2280.64 = 3717 $
Yes, farmers have reason to worry as the total revenue is reduced 43.8 %

b)
QS = 1944 + 207P & QDT (new) = 2626.4 – 212.6P
When ( P = 3.5 $ ) QS = 2668.5 B QDT (new) = 1882.3
( QS > QDT ) Surplus State
Cost = 3.5 * ( 2668.5 – 1882.3 ) = 2751.7 $

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Problem 6

The rent control agency of New York City has found that aggregate
demand is QD = 160 - 8P. Quantity is measured in tens of thousands of
apartments. Price, the average monthly rental rate, is measured in
hundreds of dollars. The agency also noted that the increase in Q at
lower P results from more three-person families coming into the city
from Long Island and demanding apartments. The city’s board of
realtors acknowledges that this is a good demand estimate and has
shown that supply is QS = 70 + 7P.
a. If both the agency and the board are right about demand and supply,
what is the free-market price? What is the change in city population if
the agency sets a maximum average monthly rent of $300 and all those
who cannot find an apartment leave the city?
b. Suppose the agency bows to the wishes of the board and sets a rental
of $900 per month on all apartments to allow landlords a “fair” rate of
return. If 50 percent of any long-run increases in apartment offerings
comes from new construction, how many apartments are constructed?
Solution
a)
State 1 :
• To get the free market price & Q ( QD = QS ) :
• 160 – 8P = 70 + 7P P=6 Q = 112
• Price = 600 $ Q = 112 * 104 apartments
State 2 :
• When price = 300 $ (P = 3)
• QS = 70 + 7 * 3 = 91 Q = 91 * 104 apartments

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• One apartment for family from 3 person
• change in city population = 3 * [ Qs (P=600) – QS(P=300) ]
• = 3 * [ 112 * 104 - 91 * 104 ] = 63 * 104 Person
b)
• when Price = 900 $ ( P = 9 )
• QS = 70 + 7 * 9 = 133 QS = 133 * 104 apartments
• The increase in supply apartments than the equilibrium will be
(1,330,000 – 210,000 = 210,000).
• The number of apartments were constructed will be 50% of 210,000,
= 105000 apartments

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Problem 7

In 1998, Americans smoked 470 billion cigarettes, or 23.5 billion packs

of cigarettes. The average retail price was $2 per pack. Statistical studies
have shown that the price elasticity of demand is -0.4, and the price
elasticity of supply is 0.5. Using this information, derive linear demand
and supply curves for the cigarette market.
Solution
• Qo = 23.5 billion pack & Po = 2 $/Pack & EpD = - 0.4 & EpS = 0.5
• EpD = ( )*( )

- 0.4 = (2/23.5) * ( ) ( ) = - 4.7

QD = A – 4.7P
Po = 2 $/Pack & Qo = 23.5 billion pack . Sub in Eq. get ( A = 32.9 )
QD = 32.9 – 4.7 P

• EpS = ( )*( )

0.5 = (2/23.5) * ( ) ( ) = 5.875

QS = B + 5.875 P
Po = 2 $/Pack & Qo = 23.5 billion pack . Sub in Eq. get ( B = 11.75)
QS = 11.75 +5.875 P

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Problem 8

In Example 2.8 we examined the effect of a 20-percent decline in copper

demand on the price of copper, using the linear supply and demand
curves developed in Section 2.6. Suppose the long-run price elasticity of
copper demand were -0.4 instead of -0.8.
a. Assuming, as before, that the equilibrium price and quantity are P* =
75 cents per pound and Q* = 7.5 million metric tons per year, derive the
linear demand curve consistent with the smaller elasticity.
b. Using this demand curve, recalculate the effect of a 20-percent decline
in copper demand on the price of copper.
Solution
• EpD = -0.4 Po = 0.75 $ Qo = 7.5 million Ton
a)

• EpD = ( )*( )

-0.4 = (0.75 / 7.5) * ( )

• QD= A – 4P
Po = 0.75 $ & Qo = 7.5 Get ( A = 10.5)
QD = 10.5 – 4 P
b)
• QD (new) = 0.8 * QD old QD (new) = 8.4 – 3.2 P
To get the price ( Qs = QD ) Qs = - 4.5 + 16 P (From Sec 6.2)
8.4 – 3.2 P = - 4.5 + 16P
P = 0.672 $ = 67.2 Cent

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Problem 9

1997 world price = $18 per barrel

• World demand and total supply = 23 billion barrels per year (bb/yr)
• 1997 OPEC supply = 10 bb/yr.
• Competitive (non - OPEC) supply = 13 bb/yr.
SHORT RUN LONG RUN

World demand: - 0.05 - 0.4

Competitive 0.1 0.4

supply:

a) Show that the short - run demand and competitive supply curves are
indeed given by
QD = 24.08 − 0.06P.
QS = 11.74 + 0.07P.
For short run ED = - 0.05, ES = 0.1, QS = 13, QD = 23, P = 18
ED = …… = - 0.06 (slope of

line)
QD = a + bp……b = = - 0.06……23 = a - 0.06 * 18…….a = 23 +
0.06 * 18 = 24.08
QD = 24.08 - 0.06P
ES = …… = 0.07 (slope of line)

QS = a + bp……b = = 0.07……13 = a + 0.07 * 18…….a = 13 - 0.07 *

18 = 11.74
QS = 11.74 + 0.07P

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b) Show that the long - run demand and competitive supply curves are
indeed given by.
QD = 32.18 − 0.51P
QS = 7.78 + 0.29P.
For long run ED = - 0.4, ES = 0.4, QS = 13, QD = 23, P = 18
ED = …… = - 0.51 (slope of

line)
QD = a + bp……b = = - 0.51……23 = a - 0.51 * 18…….a = 23 +
0.51 * 18 = 32.18
QD = 32.18 - 0.51P

ES = …… = 0.29 (slope of line)

QS = a + bp……b = = 0.29……13 = a + 0.29 * 18…….a = 13 - 0.29 *

18 = 7.78
QS = 7.78 + 0.29P
c) in 2002 Saudi Arabia accounted for 3 billion barrels per year of
OPEC, s production. Suppose that war or revolution caused Saudi
Arabia to stop producing oil. Use the model above to calculate what
would happen to the price of oil in the short ran and in a long run if
OPEC, s production was drop by 3 billion barrels per year.
OPEC’s supply decrease from 10 bb/yr to 7 bb/yr as a result.
So the new equation of supply = supply of competitive + supply of
OPEC
In short run.
QS = 11.74 + 0.07P + 7 = 18.74 + 0.07P………at equilibrium QS = QD

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24.08 - 0.06P = 18.74 + 0.07P ……P = 41$, Q = 21.6 bb/yr.
So in short time due to decrease the OPEC, s production from 10 bb/yr
to 7 bb/yr the price increase from 18$ to 41$ and the quantity decreased
from 23 to 21.6
In long run.
QS = 7.78 + 0.29P + 7 = 14.78 + 0.29P………at equilibrium QS = QD
32.18 - 0.51P = 14.78 + 0.29P……. P = 21.75$, Q = 21 bb/yr.
So in long time due to decrease the OPEC, s production from 10 bb/yr to
7 bb/yr the price increase from 18$ to 21.75$ and the quantity decreased
from 23 to 21.

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Problem 10:

Refer to Example 2.10, which analyzes the effects of price controls on

natural gas.
a) Using the data in the example, show that the following supply and
demand curves did indeed describe the market in 1975:
Supply: Q = 14 + 2Pg + 0.25Po, Demand: Q = −5Pg + 3.75Po
Where Pg. and Po are the prices of natural gas and oil, respectively. Also
verify that if the price of oil is $8.00, these curves imply a free-market
price of $2.00 for natural gas.
b) Suppose the regulated price of gas in 1975 had been $1.50 per
thousand cubic feet instead of $1.00. How much excess demand would
there have been?
c) Suppose that the market for natural gas had not been regulated. If the
price of oil had increased from $8.00 to $16.00, what would have
happened to the free-market price of natural gas?
Solution
a) Qs = 14 + 2*2 +0.25*8 = 20
Qd = -5*2+3.75*8 = 20 → Qs=Qd → free market price: 2$ gas, 8$ oil
***
b) Qs @ 1$ for gas = 14 +2*1 +0.25*8 = 18 TCF
Qd @ 1$ for gas = -5*1 + 3.75*8 = 25 TCF
Excess of demand before regulation = 25-18 = 7 TCF
Qs @ 1.5$ for gas = 14 +2*1.5 +0.25*8 = 19 TCF
Qd @ 1.5$ for gas = -5*1.5 + 3.75*8 = 22.5 TCF
Excess of demand after regulation = 22.5-19 = 3.5 TCF
***
c) 14 + 2Pg +0.25*16 = -5Pg +3.75*16 → Pg. = 6$

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Problem 11:

a) Instant coffee price elasticity:

Es = (P/Q)(dQ/dP) =(10.48/70)((70-75)/(10.48-10.35) = -5.758
Instant coffee linear curve:
General form for demand Q=a-bP; substitution with values
75= a-b*10.35, 70=a-b*10.48 → b= 38.46, a=473.08
Q=473.08-38.46P
***
b) Roasted coffee price elasticity:
Es = (P/Q)(dQ/dP) =(3.76/850)((850-820)/(3.76-4.11)) = -0.379
Roasted coffee linear curve:
850 =a- 3.76*b, 820 =a- 4.11*b → b= 85.714, a=1172.28
Q= 1172.28 -85.714P

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Mid-term problem:
A firm is purchasing equipment for a new plant. There are two machines
with their information as shown in the following table. The interest rate
is 20%. Select the best alternative by using present worth analysis
method. Draw the cash flow for both machines.
Alternative Machine A Machine B
Initial Cost LE 30000 LE 40000
Annual benefits LE 12000 the first LE 1000 the first
year, declining LE year, increasing LE
2000 per year 2000 per year
Useful life years 6 9
Solution:
For Machine A:
PA = 30000 – 12000(P/A,20%,18) + 2000(P/G,20%,6)
+30000(P/F,20%,6) +2000(P/G,20%,6) (P/F,20%,6) +
30000(P/F,20%,12)+2000(P/G,20%,6)(P/F,20%,12)
PA = 30000 – 12000(4.812) + 2000(6.581) +30000(0.3349)
+2000(6.581) (0.3349) + 30000(0.1122) +2000(15.467) (0.1122)
PA = 6709.7486
For Machine B:
PB = 40000 – 1000(P/A,20%,18) - 2000(P/G,20%,9) +40000(P/F,20%,9)
-2000(P/G,20%,9) (P/F,20%,9)
PB = 40000 – 1000(4.812) - 2000(11.431) +40000(0.1938)
-2000(11.431) (0.1938)
PB = 16956.44
PA < PB , So we will select (PA)

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 12000 12000 12000

10000 10000 10000

8000 8000 8000
6000 6000 6000
4000 4000 4000
2000 2000 2000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

30000 30000 30000

Machine A

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 17000 17000
15000 15000
13000 13000
11000 11000
9000 9000
7000 7000
5000 5000
3000 3000
1000 1000

01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

40000 40000

Machine B

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