Question

5. The market supply curve of anvils is given by QS = 35, 000 + 20P...

5.
The market supply curve of anvils is given by QS = 35, 000 + 20P . The demand for anvils can be segmented into two components. The first component is the demand for anvils by farriers (horseshoers). This demand is given by qF = 17, 000 − 2.5P . The second component is the demand for anvils by all other consumers. This demand is given byqO =25,000−20P.

(a) Derive the total market demand curve for anvils. (b) Find the equilibrium market price and quantity.

(c) Determine the consumer surplus for each type of consumer – farriers and all others

a) Total market demand is Q = 25000 + 17000 - 20P - 2.5P or Qd 42000 - 22.5P. Market supply is Qs = 35000 + 20P. Market equilibrium has Qd = Qs

42000 - 22.5P = 35000 + 20P

7000 = 42.50P

P = 164.7 approximately and Quantity for farriers = 17000 - 2.5*164.7 = 16558. Quantity for other consumer = 25000 - 20*164.7 = 21706. Market quantity = 38924

b) CS (farriers) = 0.5*(max price - current price)*current quantity = 0.5*(17000/2.5 - 164.7)*16558 = 54,933,649

CS (others) = 0.5*(25000/20 - 164.7)*21706 = 11,778,761

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