Question

1: Assume that demand for a commodity is represented by the equation P = 10 – 0.2 Q d, and supply by the equation P = 5+ 0.2 Qs where Qd and Q s are quantity demanded and quantity supplied, respectively, and P is the Price. Use the equilibrium condition Qs = Qd 1: Solve the equations to determine equilibrium price.

2: Now determine equilibrium quantity.

3: Graph the two equations to substantiate your answers and label these two graphs as D1 and S1.

4: Furthermore; assume the demand for this product increases because of a change in income. A: graph the new demand curve and label as D 2.

Answer 1

Demand is P = 10 – 0.2 Q d, and supply is P = 5 + 0.2Qs At equilibrium condition Qs = Qd

1: Solve the equations to determine equilibrium price.

Qd = 10/0.2 - P/0.2

Qd = 50 - 5P and similarly Qs = 5P - 25

50 - 5P = 5P - 25

75 = 10P

P = $7.5

2: Now determine equilibrium quantity.

Equilibrium quantity is

10 - 0.2Qd = 5 + 0.2Qs

5 = 0.4Q

Q = 12.5 units

3: Graph the two equations to substantiate your answers and label these two graphs as D1 and S1.

Graph is shown below

4: Furthermore; assume the demand for this product increases because of a change in income. The demand shifts out as income is increased which raises both price and quantity

.