Question

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20 18 16 14 12 0,2 0 123 45 789 10 QUANTITY (Millions of CDs) Because you understand the law of demand, you can deduce that the correct graphical representation of the demand for CDs must be CDs . Moreover, you know that at a price of $10 per CD, the is five million Grade It Now Save & Continue

Answer 1

Answer

According to a law of demand, ceteris paribus (i.e. all other things remaining constant) if price of a commodity increases quantity demanded decreases or if price of a commodity decreases quantity demanded increases. Hence There is negative relationship between price and quantity demand. This implies that demand curve is downward Sloping. We can see from above graph that D₁ is downward sloping. Hence the correct graphical representation of the demand for CDs must be D₁

From the D₁ Curve it is clear that when Price = $10, quantity demand = 5 million CDs.

Hence we know that at price of $10 per CD, the quantity demand is 5 million CDs

NOTE:

According to a law of Supply, ceteris paribus (i.e. all other things remaining constant) if price of a commodity decreases quantity supplied decreases or if price of a commodity increases quantity supplied increases. Hence There is positive relationship between price and quantity supplied. This implies that Supply curve is upward Sloping. We can see from above graph that D₂ is upward sloping. Hence the correct graphical representation of the Supply for CDs must be D₂

From the D₂ Curve it is clear that when Price = $10, quantity Supplied = 5 million CDs.

Hence we know that at price of $10 per CD, the quantity supplied is 5 million CDs

Hence at price = Quantity demand = quantity supplied => Market is in equilibrium.

Hence, Equilibrium Quantity = 5 million CDs