Question

General Electric is an mp3 players’ producer. Demand and supply functions of mp3 players are as

follows:

QD= 1,450 - 25P (Demand)

QS= -100 + 75P (Supply)

Where P is the price of mp3 players.

1. Calculate the market equilibrium price/output combination.

2. What will happen in the market if the price of mp3 players increased to $40?

3. How will the market adjust?

4. What will happen in the market if the price of mp3 players increased to $10?

5. How will the market adjust?

Answer 1

1.To find equilibrium price and quantity we need to solve this equation:

$1450-25P=-100+75P$

$100P=1550$

$P'=15.5$

$Q'=1450-25\times15.5$

$Q'=1062.5$

So, P=15.5 and Q=1062.5.

2.When the price is $40 the quantity demanded is 450, but the quantity supplied is 2900. So suplly exceedes suply.

3.In such circumstances the amount actually sold on the market will be 450. In long-run the suply curve will shift to the left and new equilibrium(with higher price and higher quantity) will be established.

4.When the price is $10, the quantity demanded is 1200, but the quantity suplied is 250.

5.The quantity which will be sold on the market will be 250. In long-run the suply curve will shift to the right and new equilibrium(with lower price and higher quantity) will be established.