Question

Suppose in a market the demand for a good is Q =100 - 2 p and its supply is Q =-20 + p . Answer

the following questions, showing your working.

(i) Find the equilibrium price and quantity in this market. Name this equilibrium point (i.e. the point

where the demand and supply lines intersect) as point A.

(ii) What is the total expenditure of consumers in this equilibrium?

(iii) What is the consumer surplus in this equilibrium?

(iv) What is the producer surplus in this equilibrium?

Now suppose supply changes to Q =-20 +2 p , while demand remains the same as before.

(v) Does this change represent an increase or decrease in supply?

(vi) What is the new equilibrium price and quantity? Name this equilibrium point as point B.

(vii) What is the total expenditure of consumers in this new equilibrium?

(viii) What is the total surplus in this new equilibrium?

(ix) What is the price elasticity of demand between the two points A and B? Use the midpoint method

for your calculation.

[Notice how price elasticity of demand and the change in total expenditure are related in the manner

we had discussed in class].

Answer 1