Question

1. Consider the following demand and supply functions for a good or service: Qd = 400 - 5P and Qs= 3P.

a) Graph the supply and demand functions in the typical manner with price per unit (P) on the Y-axis and quantity on the X-axis. Make sure to clearly mark X-intercept and Y-intercept on the graph.

b) What is the slope of each line? Show your calculations.

c) What is the equilibrium price and quantity? Show your calculations. Show the equilibrium point on the graph.

d) Calculate the consumer surplus. Show your calculations. Shade the consumer surplus area on the graph.

e) Calculate the producer surplus. Show your calculations. Shade the producer surplus area on the graph.

f) Calculate the own price elasticity of demand for a $20 decrease in price. Show your calculations. Interpret your numerical finding for the price elasticity of demand. Is demand price elastic or inelastic for this good? Explain why.

Answer 1

On the graph the supply curve and demand curve are plotted inversely.The intercept of demand curve is 80 and the intercept of supply curve is 0.

2.Slope of inverse of demand curve=1/5

Slope of supply curve=1/3

C.At equilibrium Qd=Qs

400-5P=3P

8P=400

P=50

Q=3(50)=150

D.

Consumer surplus=Area ABC

CS=(AC*BC)/2

AC=80-50=30

BC=150

CS=(30*150)/2=2250

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