In Smalltown, Pennsylvania the demand function for men’s haircuts is given by Qd = 500 – 30p + 0.08Y, where Qd is quantity demanded per month, p the price of a haircut and Y the average monthly income in the town. The supply function for men’s haircuts is Qs = 100 + 20p – 20w, where Qs is the quantity supplied and w the average hourly wage of barbers.
a. If Y = $5,000 and w = $10, use Excel to calculate quantity demanded and quantity supplied for p= $5, 10, 15, 20, 25, and 30. Calculate excess demand for each price. (Note that an excess supply is negative excess demand). Determine the equilibrium price and quantity. Use Excel’s charting tool to draw the demand and supply curves.
b. Assume that Y increases to $6,875, and w increases to $15. Use Excel to re-calculate quantity demanded, quantity supplied and excess demand for p= $5, 10, 15, 20, 25 and 30. Determine the new equilibrium price and quantity. Use Excel to draw the new demand and supply curves. How can you explain the change in equilibrium?