Challenge 3. (20 Points) Use the concepts/methods related to the lectures on Bas
ID: 1150411 • Letter: C
Question
Challenge 3. (20 Points) Use the concepts/methods related to the lectures on Basic Economic Concepts A consultant has estimated that the demand D for a particular product would be approximated by the following equation for prices between S200 and S800, where P is the price: D 1000-P The supply S for this product is estimated to be as follows: S-5000.5P Question 3.a. (6 Points) Question 3.b. (7 Points) What will be the equilibrium price? Suppose that demand is expected to increase in proportion to population growth. What will the equilibrium price be in 10 years if population grows by 10%? Suppose a new technology allows suppliers to cut their marginal costs by S50/unit, what would be the new equilibrium price in 10 years and what would be the new equilibrium vohume? (Assume that demand will grow tby 10% as in part b) Question 3.c. (7 Points)Explanation / Answer
A) Equilibrium occurs when the demand and supply are equal
1000 - P = 500 + 0.5P
500 = 1.5P
This gives P* = 5000/15 = 1000/3 and quantity Q* = 1000 - 1000/3 = 2000/3 units.
B) Now demand increases by 10% then new demand function is Dnew = Q + 10% of Q = 1000 - P + 100 - 0.10P. Hence Dnew = 1100 - 1.1P and supply is 500 + 0.5P. New equilibrium price is
1100 - 1.1P = 500 + 0.5P
1600 = 1.6P
P* = 1000. New price will be 1000
c) New supply is Q = 500 + 0.5*(P - 50) or Q = 475 + 0.5P. The new equilibrium is
475 + 0.5P = 1100 - 1.1P
P* = 390.625 and Q* = 1100 - 1.1*390.625 = 670.3125.
This will be the new price and quantity.