Question

Assume that demand for a commodity is represented by the equation P = 20 – 0.6 Q d, and supply by the equation P = 10 + 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; using demand and supply show what happen to equilibrium price and quantity if eating this product causes cardiac problem.

Answer 1

1.

Qd=QS
(20-P)/0.6=(P-10)/0.2
4-0.2P=0.6P-6
10=0.8P
P=12.5

2.

Qd=(20-12.5)/0.6 = 12.5

3.

4.

People would change their preferences from health point of view which reduces the demand and hence the demand curve shifts to left. This shift would cause the equilibrium price to reduce.