Question

The equation of the demand function is XD=35-3P, and the equation of the supply function is XS=5+2P.

1. By how much does quantity demanded change when the price increases by $1. EXPLAIN

2. Find the equilibrium price and equilibrium quantity. SHOW YOUR CALCULATIONS.

3. In EXCEL, plot supply and demand on a graph with quantity on the x-axis and price on the y-axis. Indicate clearly on the graph the vertical and horizontal intercepts for supply and demand, the equilibrium price and quantity. COPY THE GRAPH FROM EXCEL AND INSERT IS HERE.

4. Assume the price is set at $7. Will there be a shortage or a surplus? Compute the size of the shortage/surplus. SHOW YOUR CALCULATIONS

Answer 1

Given, quantity demanded is Q = 35 - 3P

and supply function, Q = 5 + 2P

a. When the price changes by $ 1 then the change in demand will be

Assume P = $ 0

Quantity demanded, Q = 35 - 3 × 0 = 35 units

When P = $ 1 (Increased by 1)

Quantity, Q = 35 - 3 × 1 = 32 units

Thus, with the increase in price by $ 1 the quantity demanded decreases by 3 units.

b. Calculating the equilibrium price and quantity

Equate demand and supply function

35 - 3P = 5 + 2P

=> 3P + 2P = 35 - 5

=> 5P = 30

=> P = $ 6 per unit

Q = 35 - 3P = 35 - 3 × 6 = 17 units

Equilibrium price = $ 6 per unit

Equilibrium quantity = 17 units.

c. Refer the attached picture for the graph

d. When price = $ 7 per unit

Quantity demanded = 35 - 3 × 7 = 35 - 21 = 14 units

Quantity supplied = 5 + 2 ×7 = 5 + 14 = 19 units.

At a price of $ 7 quantity supplied is greater than quantity demanded. Hence there will be surplus in the market at this price.

Surplus = Quantity supplied -Quantity Demanded

Surplus = 19 - 14

Surplus = 5 units.

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