Question

Q2. Sub Mart Inc. needs to decide the optimal price to charge and the optimal quantity to supply in the market. The demand function of the product is given as QD=40-2P, while the supply function of the product is given as QS=2P where P is the price, QD is quantity demanded, and QS is quantity supplied. Solve the following demand function is given as: QD=40-2P. Calculate the equilibrium price and quantity. (5Marks)

Q3. Consider the demand for apples. If the prices of a substitute good(bananas) increases and the price of a complement good (apple pie) increases, can you tell for sure what will happen to the demand for apples? Why or why not? (Illustrate your answer with a graph,  software program )

Answer 1

Q2) at eqm, Quantity Demanded = Quantity supplied

40-2P = 2P

40= 4P

P*= 10 , Q*= 2*10= 20

Q3)

If price of substitute good rises, then demand for Apples will rise, & it's Demand curve will shift to right

If price of Complements good rises, then demand for Apples will decrease, & demand curve will shift to left

Thus net effect on demand could be

1) increase, when rightwards shift is more than left shift

2) Decrease, when left shift outweighs right shift

3) unchanged, the two opposing effect cancels out each other