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    Equilibrium Price and volumes

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    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)?

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    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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