Question

In the market for good X, demand is QD = 6,000 – 0.8P and supply is QS = 0.4P – 300. A) What are the equilibrium price and quantity? B) What are consumer and producer surplus at market equilibrium? C) Suppose that an increase in consumer income makes consumers value each unit of good X $500 more. Also, a technological breakthrough in production decrease the marginal cost of each unit of good X by $500. What are the new equilibrium price and quantity?

Answer 1

Given,

Inverse demand function,

And,

​​​​​​

At equilibrium the quantity demanded will be equal to quantity supplied

Equilibrium price = $ 5,250 per unit

Equilibrium quantity = 1,800 units

b. Consumer surplus = (1/2)×(7,500 - 5,250) × 1800

= $ 2,025,000

Producer surplus = (1/2)×(5,250 -750)×1,800

= $ 4,050,000

c. When consumer values each unit $ 500 more then the new demand curve will be

P = 8,000 - 1.25Q

Suppliers cost decreases by $ 500 due to technological advancement

P = 250 + 2.5Q

Equate these two equations we get

8,000 - 1.25Q = 250 + 2.5Q

=> 3.75Q = 7,750

=> Q = 2067

P = 250 + 2.5 × 2,067 = $ 5,417 (Approximately)

Please contact to having any query will be obliged to you for your generous support. Your help mean a lot to me please help. Thank you