Question

A free market has a demand curve Qd = 125 - 4p and supply curve Qs = -95 + 7p a. Draw Demand and supply curve; illustrate all changes on the graph. Calculate the equilibrium price and quantity for this market. c. Explain and indicate on your graph what occurs to this market when a $15 subsidy is placed.

Answer 1

Answer a)

Qd= 125-4p

X Intercept ( keeping P=0) = 125

Y Intercept ( keeping Qd=0) = 31.25

Qs=-95+7p

X Intercept (Keeping P=0) = -95

Y Intercept ( Keeping Qs=0) = 13.57

Answer b) At Equilibrium Qd= Qs

125-4p=-95+7p

220= 11p

P*=20

Q*=125-4p or -95+7p

Q*= 45

Equilibrium price=20

Equilibrium quantity=45

Answer c) With $15 subsidy

New Qs=-95+7(p+15)

X Intercept ( keeping p=0)=10

Y Intercept ( keeping Qs=0)= -1.42

Qd=125-4p

X Intercept ( keeping p=0)=125

Y Intercept (keeping Qd=0)=31.25

At new Equilibrium new Qs= Qd

-95+7p+105=125-4p

10+7p=125-4p

P'=10.45

Q'= 125-4P= 83.2

• In the graph the original demand and supply curve are DD and SS respectively and original Equilibrium is at point E

• With a subsidy of 15 the supply curve shifts to right from SS to SS1 .

• The new Equilibrium is at point E1