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Suppose that the demand and supply curves for ethanol in the United States are represented by...

Suppose that the demand and supply curves for ethanol in the United States are represented by the following equations:

QD = 1,600 − 320P
QS = −800 + 640P

where QD is the quantity demanded (in millions of gallons per month), QS is the quantity supplied, and P is the price (in dollars per gallon).

In the scenario above, if the market is in equilibrium, the price of ethanol is $(blank) per gallon and the quantity of ethanol sold is (blank) million gallons per month.

Now suppose that a severe drought in the Midwest raises the price of corn, the main ingredient used in ethanol production. As a result, the quantity of ethanol supplied decreases by 480 million gallons per month at every price. After the market has adjusted to the new conditions, the price of ethanol will be $(blank) per gallon and the quantity of ethanol sold will be (blank) million gallons per month.

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Answer #1

At equilibrium, QD=QS

1600-320P= -800+640P

P=2.5

Q=800

Thus, the price of ethanol is $2.5 per gallon and the quantity of ethanol sold is 800 million gallons per month.

After a severe drought raises the price of corn implies supply decreases by 480 million per month hence supply curve changes to QS= -1280+640P

At equilibrium, 1600-320P = -1280+640P

P=3

Q=640

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