Be brief and to the point. Grade does not depend upon the length of your answer. The following relations describe demand and supply. Qd = 30,000 - 100P Qs = -10,000 + 100P Where P is price in dollar...

BU 555 Fall, 2003
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Be
ief and to the point. Grade does not depend upon the length of your answer.
1. The following relations describe demand and supply.

Qd = 30,000 - 100P
Qs = -10,000 + 100P
Where P is price in dollar and Q is quantity in unit.
a. Find the equili
ium (market clearing) price and quantity alge
aically.

In equili
ium, quantity demanded equals quantity supplied.
So, in equili
ium, Qd = Qs

30,000 - 100P = -10,000 + 100P
200P = 40,000
P = 200
Q = 30,000 – 100(200) = 10,000
These are the market clearing price and quantity.
. What would be the quantity demanded and the quantity supplied when P = $110 as
opposed to the market clearing P and Q in (a)
At this price, the quantity demanded is:
Qd = 30,000 – 100(110) = 19000
And quantity supplied is:
Qs = -10,000 + 100(110) = 1000
So, when the price is below the equili
ium price, consumers demand more,
whereas the producers supply less.
c. What would happen to price in (b) in view of the market clearing price you
obtained in (a) and why?
The price of $110 is below the equili
ium price level of $200. For this price,
consumers are willing to purchase a larger quantity than the sellers are
willing to sell. This means that there is an excess demand in the market. In
this case, a shortage of goods emerges as consumers are unable to purchase
all they wish to buy. So, consumers may offer higher prices in an attempt to
get these goods. Also, suppliers may ask for higher prices since the demand is
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not met. Thus, an excess demand will lead to rise in prices. Thus, price in (b)
would rise until it reaches $200.
We can show this diagrammatically also:


d. Suppose this is prescription drug that a terminally ill patient needs. If $110 is only
price the patient can afford to pay, would the patient be able to get it? Why or
why not?
In a perfectly competitive industry, the patient will not be able to get the
drug, since equili
ium price is higher than $110. However, in case the
government imposes a price ceiling of $110, then the patient may be able to
get the drug. Also, if the drug is patented, then there will be a monopoly
market situation. If the monopolist practices perfect price discrimination,
then the patient can pay only $110 and get the drug. However, such a practice
is not possible in real world.
e. What would be the quantity demanded and the quantity supplied when P = $290?

Qd = 30,000 -100(290) = 1000
Qs = -10,000 + 100(290) = 19000
f. What would happen to price in (e) in view of the market clearing price you
obtained in (a) and why?
At the price of $290, consumers are willing to purchase a smaller quantity
than the producers are willing to sell. Therefore, there is an excess supply in
the market. In case of an excess supply, producers will not be able to sell some
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of the units of the good they produce at $290. Therefore, to induce more
customers to buy the product, prices would be lowered until the equili
ium
price of $200 is reached.
g. What would be the implication in terms of market efficiency behind non-bidding
econstruction contracts of US government in Iraq at P = $290?
There would be a dead weight loss associated with non-bidding
econstruction contracts at P = $290. Since, there is no bidding, prices would
not go below $290, and the market would not have its market clearing price of
$200. This would result in a loss of total surplus and thus, inefficiency in the
market. If there was bidding, prices would be bid down until the market
clearing price is reached.
h. At what price would quantity demanded be zero and at what price would quantity
supplied be zero?
Qd = 30,000 - 100P
0 = 30,000 – 100(P)
P = $300
So, quantity demanded will be zero when price is $300.
Qs = -10,000 + 100P
0 = -10,000 + 100P
P = $100
So, quantity supplied will be zero when price is $100.
i. What does the spread between the two prices (the price where quantity demanded
is zero and the price where quantity supplied is zero) imply in this market?
It implies that the market will not exist if prices are below $100 or above
$300. This is because, for a market to exist there must be at least one
consumer and one producer. At $100 or below, no producers are ready to
supply in the market and at prices above $300, there will be no consumers in
the market.
j. Calculate the price when quantity demanded is 1,000 units and also the price when
quantity supplied is 1,000 units.
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When quantity demanded is 1000 units:
1000 = 30000 – 100P
P = $290
When quantity supplied is 1000 units:
1000 = -10,000 + 100P
P = $110
k. Plot the price for 1,000 units of quantity demanded and the price for 1,000 units of
quantity supplied on the same diagram in (a). Would there be buyers for the
quantity of 1,000 units and would be sellers for the quantity of 1,000 units
considering the market clearing P and Q you got in (a)? The fact that quantity
1,000 exceeds market clearing Q is not the answer. Provide numerical support for
your answer. How about 5,000 units? Would there be buyers for 5,000 units?
What is the difference in your numerical support for the case of 1,000 units and
5,000 units?
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At a quantity of 1000 units, there is a wedge between the price at which
consumers are willing to pay is $290, whereas the price at which suppliers are
willing to sell in $110. As a result, not all suppliers are able to sell in the
market and due to limited supply, not all consumers are able to buy the
product. When the quantity increases to 5000 units, the price that consumers
are willing to pay becomes $250 and the price at which suppliers are willing
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