Question

1. Consider a demand curve of the form QD = 40 - 2P, where QD is the quantity demanded and P is the price of the good. The supply curve takes the form of QS = -4 + 2P, where QS is the quantity supplied, and P is the price of the good. Be sure to put P on the vertical axis and Q on the horizontal axis. a. What is the equilibrium price and quantity? Draw out the supply and demand curves to illustrate this equilibrium.

Answer #1

1. To find the equilibrium quantity and price, we need to equate demand and supply equation-

QD = QS

=> 40 - 2P = -4 + 2P

=> 4P = 44

Therefore, equilibrium price or P* = 11

Similarly,

In order to find the equilibrium quantity, we will put the value of P* in either demand or supply equation.

=>Q* = 40 - 2(11)

=> Q* = 40 - 22 = 18

Thus, Q* or equilibrium quantity exchanges is 18.

The equilibrium can be graphically shown as below-

The point of equilibrium is the intersection of demand and supply curve as represented by point e above.

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