Question

Question4 a. The demand for pocket calculators is given by the function P = 6-0.5Qp and the supply is given by the function: 6= price and quantity in this market [6 marks] P. Calculate the equilibrium Qs b. Explain with the aid of an example, the law of demand and the law of supply. [4 marks] c. The diagram below represents the market for pizza. Equilibrium price and quantity are $20 and 6 pizzas, respectively. Assume that the price of cheese increases (cheese is an important ingredient in pizza). supply demand Q* quantity Explain the adjustment process in the pizza market after the shock to the new equilibrium [6 marks] price

Answer 1

a.

Demand for pocket calculators, P = 6 - 0.5Q_D

=> Q_D = 12 - 2P

Supply is 6 = Q_S - P

=> Q_S = 6 + P

At Equilibrium, Q_D = Q_S

=> 12 - 2P = 6 + P

=> 3P = 6

=> P* = 2

Therefore Q* = 8

The equilibrium price is 2 and the equilibrium quantity demaded and supplied is 8 units.

b.

The law of demand states that as the price of a commodity decreases, the quantity demanded by the consumer increases. For example, suppose the price of a sweet is $1 per unit and he has $5. He can buy 5 units of sweet. But the price of sweet falls to $0.5, now with the same amount he will buy more unis of sweets.

The law of supply states that as the price of the commodity increases the suppliers tend to increase their supply of the good. For example, Suppose a pen costs $5 per unit and the price increases to $7. The suppliers will increase their supply of pens in order to increase their revenue.

c.

Here, cheese is an important ingredient for pizza and hence is a complement good. When the price of the complement increases the demand for the good decreases owing to increased cost. Hence, when the price of cheese increases the demand curve shift towards left, assuming the supply curve to be constant.

supply 620 p/ demaud 2'