Question

2. The market for Instagram followers is defined by these equations: QD = 3000−200P QS = 300P + 500

(a) Find the equilibrium price and quantity.

(b) Graph the supply and demand curves and clearly label the equilibrium.

(c) If an Instagram poster refuses to pay for followers (P = 0), how many followers will he have? (Hint: You won’t find an equilibrium at this price, but how many will the market supply?)

(d) Why might the market supply a nonzero number of followers even at a price of zero?

3. Although the technology for smartphones has improved greatly, and the components for producing a smartphone are less expensive than they were at the debut of the iPhone, the price of a new iPhone is more than double the cost of an original iPhone. How would an economist explain this increase in price?

Answer 1

(a)
Equilibrium price and quantity is determined by the point where
QD = QS
3000−200P = 300P + 500
3000−500 = 300P + 200P
500P = 2500
P* = $5 per unit
Substitute P = 5 in one of the equations to arrive equilibrium quantity:
Q* = 3000-200*5
Q* = 2000

(b)

Below is the diagram as drawn in excel -

Point E is the market equilibrium.

(c) At P = 0, QS = 300*0 + 500 = 500
That is, at price = 0, the number of followers will be 500.

(d) Market might supply non zero number of followers as some followers will be obtained organically. That is, followers who follow simply because they like the content that is put on that account.

3. Price is influenced not just by supply but also the demand for iphones. Demand for iphones depends on multiple factors such as income of the buyers, price of substitutes and tastes and preferences. Jointly these factors the elasticity of demand for iphones. The iphones can be assumed to be an inelastic product due to their uniqueness. Hence, one can conclude that an increase in price could be also driven by demand side factors.