Question

For this question you will need to upload a file. It is question 3 from the PDF file I sent you. Please show your work. The following information is given about the market for a normal good.

Demand: P = 150-2Qd

Supply P = 20+ 0.5 Qs

1. What is the quantity demanded at a price of $80? (1.5 mark)
2. What is the quantity supplied at a price of $80? (1.5 mark)
3. At a price of $80 the market is not in equilibrium. Describe the process by which the price will act as a regulator in the market. You do not need to use complete sentences, point form is acceptable. (2.5 marks)
4. What is the equilibrium price and quantity? (2.5 marks)
5. Without any numerical information, make a prediction about the change that will occur in this market given a rise in income.

Answer 1

Demand: P = 150-2Qd

At P=$80, the quantity demanded is:

80 = 150 - 2Qd

2Qd = 150 - 80

2Qd = 70

Qd = 70/2 = 35

Hence, the quantity demanded at a price of $80 is 35

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Supply P = 20+ 0.5 Qs

At P=$80, the quantity supplied is:

80 = 20+ 0.5 Qs

0.5Qs = 80 -20

0.5Qs = 60

Qs = 60/0.5 = 120

Hence, the quantity supplied at a price of $80 is 120

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At a price of $80 the market is not in equilibrium as quantity demanded is not equal to the quantity supplied.

Since excess supply exists, so there will be downward pressure on the price.

As the price lower, the quantity demanded increases, and quantity supplied decreases.

Thus, price acts as a regulator in the market.

Eventually, a price will be attained at which the market clears such that market demand is equal to market supply.

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Eventually, equilibrium is attained where Qd = Qs, such that there exists one price at which the market clears.

150-2Qd = 20+ 0.5 Qs

150-2Q* = 20+ 0.5 Q*

2.5Q* = 130

Q* = 52

P* = 20 + 0.5Q* = 20 + 0.5*52 = $46

Thus, price acts as a regulator in the market such that price falls from $80 to $46 to ensure market clears such that market demand is equal to market supply.

The equilibrium price is $46 and the equilibrium quantity is 52

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When the income increases, the purchasing power of the customer increases. Given the supply curve, there will be rightward shift in the demand curve with the increase in money income. The equilibrium price will rise and the equilibrium quantity demanded & supplied would also increase.