Question

2

Surgex Ltd produces surgical masks and its market is characterised by the following equations

𝑸 = 15 − 0.2P ; 𝑸s = −𝟏 + 0. 6P

(a) Using a diagram, draw the demand and supply curve. [show all workings]

(b) Calculate the equilibrium price and quantity

(c) Calculate the consumer surplus

Answer 1

Solution:

a.). Qd intercept:

Qd = 15 – 0.2P

15 – 0.2P = 0

15 = 0.2P

P = 75

Qs intercept:

Qs = -1 + 0.6P

-1 + 0.6P = 0

-1 = -0.6P

P = 1.67

The demand and supply curve is as below:

 

 

b.). At equilibrium: Qd = Qs

15 – 0.2P = -1 + 0.6P

15 + 1 = 0.6P + 0.2P

16 = 0.8P

P = 20

Equilibrium price = 20

Substitute in the demand function to derive the equilibrium quantity:

Qd = 15 – 0.2P

Qd = 15 – 0.2(20) = 15 – 4 = 11

Equilibrium quantity = 11

 

c.). Consumer surplus =$\frac{1}{2}\times 11\times (75 - 20) = \frac{1}{2}\times 605 = 302.5$

Consumer surplus = 302.5