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Equilibrium Price and volumes

1). Suppose the demand and supply curves for a product are given by

Qd = 500 - 2P
Qs = - 100 + 3P

a.Graph the supply and demand curves.
b.Find the equilibrium price and quantity.
c.If the current price of the product is $100, what is the quantity supplied and the quantity demanded? How would you describe this situation and what would you expect to happen in this market?
d.If the current price of the product is $150, what is the quantity supplied and the quantity demanded? How would you describe this situation and what would you expect to happen in this market?
e.Suppose that demand changes to Qs = 600 - 2P. Find the new equilibrium price and quantity, and show this on your graph.

2). Consider the market for automobiles, and draw representative supply and demand curves.
a.Suppose that the price of gasoline rises, and at the same time, the price of steel (an input to automobile production) falls. Show this on your graph. If you have no other information, what can you say about the change in equilibrium price and quantity?
b.Now suppose that you have the additional information that the rise in gasoline prices has been relatively large, while the reduction in steel costs has been relatively small. How would this change your answer to (a)?

Solution Preview

Please refer attached file for complete solution. Graphs may not print here.

Solution:

a. Graph the supply and demand curves.

By using given demand and supply functions, following table can be generated
(See into cells for formulas)

P Qs=-100+3P Qd=500-2P
100 200 300
110 230 280
120 260 260
130 290 240
140 320 220

Find the equilibrium price and quantity
For equilibrium Qd=Qs
500-2P=-100+3P
3P+2P=500+100
5P=600
P=600/5=120
Qd=500-2*120=260
Qs=-100+3*120=260
Equilibrium Price =$120
Equilibrium Quantity=260

If the current price of the product is $100, what is the quantity supplied and quantity
demanded? How would you describe this situation? What would you expect to happen in this
market (will the price go up or down)?

Suppose P=$100
Qd=500-2*100=300
Qs=-100+3*100=200
Quantity demanded is more than quantity supplied. It is a ...

Solution Summary

There are two problems. Solution to first problem explains the steps for finding equilibrium price and quantity for given demand and supply functions. It also analyzes the effect of given hypothetical market price and demand and supply scenario. Solution to second problem analyzes the effect of changes in gasoline and steel prices on automobile industry with the help of suitable graphs.

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