Question

The market for a product has inverse demand and supply functions given by p = 290 - 2Qd and p = 10 + 1.5Qs

1. In what form are these functions in? (2pts)

2. Find the market equilibrium quantity Q* and price P*. (5pts)

3. Draw out a simple graph with these curves. Label the p-intercept for each and indicate the equilibrium points. (5pts)

4. Find the consumer and producer surpluses, along with the total surplus.(10pts)

(i) Would this market be considered efficient? (2pts)

Answer 1

The inverse Demand : P=290-2Qd and SUpply: P=10+1.5Qs

1) Forms: Demand is downward slopping line and supply is positive slopping  line

2) Market Equilibrium: Solve for Q in Demand = Supply

290-2Q= 10+1.5Q => Q* = 80 and P=10+1.5*80= 130 ; P*=130

3)

4)

Producer Surplus: Area of rectangle: =80*130 = 10400

Consumer Surplus: Area of above small triangle : (1/2)(290-130)(80) = 6400

Total Surplus = 6400+10400 = 16800

as there is NO Dead Weight Loss... Thus this market is efficient.