Question

2. Consider a perfectly competitive market with market supply Q_s=-2+P and market demand Q^d = 30-P. What is consumer surplus in this market?

Answer 1

Answer 2

Market is in equilibrium when Quantity demand = quantity supplied(i.e. Qd = Qs) and Equilibrium or market price is that price at which Qs = Qd.

Here Qs = -2 + P and Qd = 30 - P

At equilibrium , Qs = Qd => -2 + P = 30 - P => P = 16.

So, Q = -2 + P = -2 + 16 = 14

=> equilibrium Price(P) = 16 and equilibrium Quantity(Q) = 14

Consumer surplus is the area above Price level and below demand curve.

Hence Consumer Surplus = A

= (1/2)(14)(30 - 16)

= 98.

Hence Consumer Surplus = 98