Answer to Question #302346 in Microeconomics for Muna

Question

a)      Market research has revealed the following information about the market for chocolate bars: the demand schedule can be represented by the equation QD = 1600 – 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS =1400 + 700P, where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for chocolate bars.

b)     Assuming the market price of chocolate is 0.5, given the equilibrium price calculated in (a) above, explain the possible market situation with the aid of a diagram.

Answer 1

a) Calculate the equilibrium price and quantity in the market for chocolate bars.

At equilibrium, the quantity demanded is equal to the quantity supplied.

Q_d =1600 - 300P

Q_s =1400+700P

1600-300P = 1400 + 700P

By collecting the like terms:

1600-1400=700P+300P

200 = 1000P

P = 0.20

Therefore, equilibrium price = $ 0.20

To get quantity demanded at equilibrium, we substitute the price in the quantity demanded equation:

Q_d=1600 - 300(0.2)=1540

Q_s=1400 + 700(0.2)=1540

Thus, the quantity at equilibrium is 1540 units.

The equilibrium price of a chocolate bar is $0.20 and the equilibrium quantity is 1,540

bars. 

b) Assuming the market price of chocolate is 0.5, given the equilibrium price calculated in (a) above, explain the possible market situation with the aid of a diagram.

If the price of chocolate is 0.5, the quantity demanded is Q_d = 1600 - 300(0.5)=1450.

If the market value for chocolate is $ 0.5, the equilibrium quantity demanded will be 1450 bars.

This is shown in the graph below: