Problem
Consider the wine and cheese problem you solved in Problem 3. Suppose the demand for wine changes so that at every price, 10 fewer bottles are demanded.
a. Hold the price of cheese constant, and calculate the partial equilibrium effects of the change in the demand for wine. What happens to the price? What happens to the quantity?
b. Plug the new price of wine into the demand for cheese. Does the shock to the wine market cause the demand for cheese to increase or decrease?
c. Calculate the effect of the change in demand for cheese on the price of cheese and the quantity of cheese sold.
d. Plug the new price of cheese into the demand for wine. Does it cause the demand for wine to increase or decrease? Does the wine market get pushed farther from its initial equilibrium, or back toward it? How will these changes in the wine market feed back into the cheese market?
e. Following the steps taken in Problem 3, but using the new cheese demand function, solve for the new general equilibrium price and quantity of both wine and cheese.
f. How does the final general equilibrium price and quantity of wine you calculated in (e) compare to the partial equilibrium effects you calculated in part (a)?
Problem 3:
The following statements describe supply and demand conditions in the markets for cheese and wine, respectively.
• The demand for cheese is given by Qcd = 30 - Pc - Pw, where Qc d is the quantity of cheese demanded each week in ounces, Pc is the price of a pound of cheese, and Pw is the price of a bottle of wine.
• The demand for wine is given by Qwd = 30 - Pc - Pw.
• The supply of cheese is given by Qcs = Pc.
• The supply of wine is given by Qws = Pw.
a. Are wine and cheese linked on the supply side of the market, or on the demand side?
b. Equate supply and demand in the cheese market, and simplify to express the price of cheese as a function of the price of wine.
c. Equate supply and demand in the wine market, and simplify to express the price of wine as a function of the price of cheese.
d. Substitute the expression for the price of wine you found in (c) into the equation you found in (b) to solve for the price of cheese.
e. Plug the price you calculated in (d) into the expression you derived in (c) to solve for the price of wine. f. Plug the prices of wine and cheese you found in (d) and (e) back into either the supply or demand functions for wine and cheese to find the equilibrium quantities of wine and cheese that will be sold.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.