Answer to Question #146117 in Microeconomics for Sanaya

Question

The lockdown around the world has caused the rapid growth in the electronic market as people have shifted from conventional methods to the new methods for imparting knowledge and staying connected. If demand and supply function are given as:
Qd= 65 – 10P Qs= -35 + 15P
a. Find the equilibrium price and quantity and show it on labeled D/S diagram.
b. How do you interpret market equilibrium: (i) if P= Rs.6? (ii) if P=2?
c. Show on the Demand-Supply diagram in (a), the graphical interpretation of your answer of (b).

Answer 1

a. ANSWERS

Pe = Rs. 4

Qe = 25 units

SOLUTIONS

At equilibrium Qd = Qs

=> 65 - 10P = -35 + 15P

=> 65 + 35 = 10 P + 15 P

=> 100 = 25P

=> P = Rs. 4

Substituting Rs. 4 for P in demand equation gives

Qe = 65 - 10(4)

= 65 - 40

= 25 units

Therefore, equilibrium price is Rs. 4 and equilibrium quantity is 25 units

b. (I) When P = Rs. 6

Qd = 65 - 10(6)

= 65 - 60

= 5 units,

Qs = -35 + 15(6)

= -35 + 90

= 55 units

Qs - Qd = 55 - 5

= 50 units (excess supply)

Therefore, there is excess supply of 50 units in the market

(ii) When P = Rs. 2

Qd = 65 - 10(2)

= 65 - 20

= 45 units

Qs = -35 + 15(2)

= -35 + 30

= -5 units

Qd - Qs = 45 - (-5)

= 50 units (excess demand)

Therefore, if price is Rs. 2 there is excess supply of 50 units in the market.

c. Shown on the diagram in (a).