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(2)The following equations describe the market for commodity X Q(p) = 10 + 3P ........................... (1) 2 Q(P) = 15 - 2P ............….………...(2) (a)Which of the two equations is the demand equation and which is the supply equation? Explain. (b) Find the equilibrium price and the equilibrium quantity transacted in this market. (c)Find the price elasticity of demand at equilibrium and comment on how the firm could use this information if it considers a price adjustment that seeks to maximize its total revenue. (d) Suppose the adoption of a new technology improves the efficiency of producing this product by 3 units, what would be the impact of the new technology on equilibrium price and equilibrium quantity transacted in this market? (e)Assume a supply shock (prior to the adoption of the new technology) pushes the price of this product $0.75 above equilibrium, comment on the state of instability in this market.

Answer 1

Q(p) - 10+31 is the supply function 0(p) 15-2P is the demand function. The reason being in price white in perice supply increases with demand decreases with increase increase Equilib suum go - 9 = K 15 - 2P 2P² 15-q po 15 - a Is = 10+32 "37= 9-10 pa - 19 -- Equatting is and as 9=13 P= 75- .. q-13 P1

(c) Price elasticity qp = 15-27 Now suppose price changes from I to 2 A9 = (15-2x1) - 05-2+2 ) = 13- 11 .: Price Elashcity: sale Oorsa Since the price elasticity is positive, therefore it is a normal good On the other hand a price elasticity of less than 1 depicts that it is a necessity good (d) New supply function - q = 13 +3P Equaning qo & qs 13 +3P= 15-2? SP 2 P= 0.4 q - 13+ 30.4 - 14.2 units
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