Question

C) Suppose that there was a change in the demand so that the new demand curve is now: P=15 – 2Q. What is the new equilibrium price and quantity? Draw this on the diagram and call it B. Is the Point A still Pareto efficient? Why or why not? Explain.

Demand Curve: ?_? = 15 − 2?

Supply Curve: ?_? = ? + 3

At Equilibrium: ?_? = ?_?

Therefore, to find Quantity: 15 – 2? = ? + 3 → ? ^∗ = 4

To find Price: ? ^∗ = ? + 3 → ? ∗ = 4 + 3 → ? ^∗ = $7.00

Equilibrium Point, B: (?_?^∗ = 4, ?_?^∗ = $7.00)

Price (S) 14 13 10 9 8 Pa -C Equilibrium Point, B Equilibrium Point.A 6 * オ 3 2 antity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

As shown in the graph above, the new demand curve has shifted to the right. Assuming no change to the supply curve, this shift is due to an increase in demand for microphones, thereby raising the equilibrium price (P*=$7.00) and quantity, and an increased total surplus (area shaded orange). Since Equilibrium Point A now has a price and quantity lower than the new equilibrium level (Equilibrium Point B), it is no longer Pareto efficient and would result in a reduced total surplus.

Answer 1

Yes, new equilibrium quantity will be 4 units and equilibrium price will be $7.Point A Is no longer pareto efficient since there is pareto superior point B available and it creates possibility of pareto improvement.