Question

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

Answer 1

- 19 One of the best wage to know, which of the two equa Demand equation and which is a the supply equation is to place them on a diagram In diagram (A) equation - 0p) = 10 +3P is plotted. when, P=1 80p) - 13 P=2 86 = 16 P= 3, 866) = 19 We get on wned slopping line and as we all know the supply Poice cowe is upward slopping so, equation 94p) = 10+ 3p is the supply equation. Quently (B) 0 9 13 Similarly, Quantine 18 In diagram (8) equation = 8(p= 15-2P is plotted when, P=7 9 ) = 13 P-2 Q(P) - II P=3, 8C6) - 9 one can see as price increases quantity demanded decreases we get a downward slopping line So, equation, 8(p) = 15-2P is the demand conation

6 The equilibrium price and equilibrium quantity can be obtained by equating the demand and supply equations as we can see & is the point of intersection of Demand curve and Subbele Cure. This imblies, Prie that at & DD = ss. So, 0CP) = 8(6) 15-2P = 10+32 5 = 50 P= 1 -0 Q = 13- so our equilibrium Price and quantity To comes out to be 1 and 13, respectively Quantity T © to change in Price! Price elasticibe al Demand PED -6% AQ = l. change in Quantity demanded % AP =-ADAP Р - EP X Do Where AO is nothing but the slope O AP де unge AP 15-20 A8 - 2 - AP Substituting 6, & 3 in (i)

13 ² – 0.15 Inclastic Price elasticity of Demand. This means that the Percentage clange in quantity demanded is less than the percentage change in Pricee. So, if a firm increases its Price, knowing that the demand for its product is inelastic, the change in quantity demanded will be a lot less. Thereby implying that their total revenue might not be affected that much so, when the demand is inelastic an increase in price causes an increase in the total revenue as the rise in prices does not have a large impact on (2 of prode Adoption of new technology improves the efficiency this product by 3 units a This will cause a rightward shift in both the demand & supply curves a new equilibrium, El, is established. I 13 16

The equilibrium price and equilibrium quantity can be obtained by equating the demand and supply equations. we get, $E_{P} = 1 and E_{Q}=13$ .

Kindly rate the answer. Thanks.