Question

Zack has studied the kayak market in his area and has examined his sales history. He believes an additional kayak could be sold in the community for each reduction in price of $10. He also believes that at $1,800 the last customer in town would do without a kayak.

1. How would you represent algebraically the demand function for kayaks in the town?

2. If he estimates that the industry supply function for kayaks in the town is P = 700 + .5Q, how many kayaks will be sold at equilibrium and at what price would the producers be selling?

3. Next the main employer in the town outsources a significant part of the business overseas. What will happen to Zack’s demand curve, his equilibrium price and the quantity of kayaks he sells? Assume that the last customer in town will now go without a kayak if the price reaches $1,500 but that the customers still decline at the rate of one per $10 price increase.

4. Graph the story above showing the before and after outsourcing on the same graph.

Answer 1

a) The demand function can be given by:

P = 1800 - 10Q

Here, 1800 is the intercept on the Y-axis

10Q is the variable part, for each reduction in price

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b) Supply: P = 700 + 0.5Q

Equate D = S

1800 - 10Q = 700 + 0.5Q

1100 = 10.5Q

Q = 104.76 kayaks

P = $752.4 per kayak

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c) Due to outsourcing, there are many unemployed people in the town. They have lost their jobs to the foreign workers.

Due to this, the income levels of local citizens has fallen, and their demand curve will shift to the left.

New Demand curve: P = 1500 - 10Q

Supply: P = 700 + 0.5Q

Equate D = S

1500 - 10Q = 700 + 0.5Q

800 = 10.5Q

Q = 76.19 kayaks

P = $738.1 per kayak

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d) The graph is as follows:

Before outsourcing: D and S intersect at point E

After outsourcing: D" and S intersect at point E"