Question

Assume that demand for a commodity is represented by the equation P = 20 – 0.6 Q d, and supply by the equation P = 10 + 0.2 Qs where Qd and Q s are quantity demanded and quantity supplied, respectively, and P is the Price. Use the equilibrium condition Qs = Qd

1: Solve the equations to determine equilibrium price.

2: Now determine equilibrium quantity.

3: Graph the two equations to substantiate your answers and label these two graphs as D1 and S1.

4: Furthermore; using demand and supply show what happen to equilibrium price and quantity if eating this product causes cardiac problem.

Answer 1

Ans.

1) P = 20 - 0.6 Q d

0.6 Q d = 20 - P

Q d = 20 / 0.6 - P / 0.6 ...........(1)

P = 10 + 0.2 Q s

P - 10 = 0.2 Q s

P / 0.2 - 10 / 0.2 = Q s ............(2)

Equate 1 and 2 , that is Q d = Q s

20/0.6 - P/0.6 = P/0.2 - 10/0.2

20/0.6 + 10/0.2 = P/0.2 + P/0.6

33.34 + 50 = 10 P / 2 + 10 P /6

83.34 = 40 P / 6

83.34 * 6 = 40 P

500.04 / 40 = P

Thus equilibrium price = $ 12.501

2) Equilibrium quantity

Q d = 20 / 0.6 - P /0.6

Q d = 20 / 0.6 - 12.501 / 0.6

Q d = 33.34 - 20.835 = 12.505

3) The following are the graphs of Demand curve and supply curve depicted as D 1 and S 1 respectively. The two equations are graphed by substituting the values quantity in the equations. Demand curve is downward sloping curve whereas supply curve is upward sloping curve.

4) By eating this product causes cardiac problem then demand curve will shift leftwards with no change in supply curve. Thus equilibrium price and equilibrium quantity will also reduce . Hence new equilibrium will be at E 2.