Question

 Suppose the market model is described by the following demand and supply functions: Qd= 200-2P+ 4i and Qs= -200 + 3P where i =50 Answer the following questions: a) Calculate the equilibrium price (P) and quantity (Q) and indicate your answers on the graph. [03] b) If the market demand decreases by 50% what will be the new clearing price and quantity for this market? [03] c) Indicate the effect of the changes in (b) on a graph and explain what will happen to market price and quantity.

Answer 1

At equilibrium P and Q,

$Qd=Qs$

$200-2p+4i=-200+3p$

$400+(4×50)=5p$

$5p=600$

$P=120$

$Q=200-2×129+4×50$

$Q=160$

B)

C) if $Qd=169×\frac{50}{100}=80$

$Qd=200-2p+4i$

$80=200-2p+200$

$2p=480$

$P=240$

C) The market price will decrease.

The quantity supplied will also decrease.