Page 3 - Home Assignment-Price determination

Q-1. If market demand function is given as = 25 − 2. and market supply

function as = 3. , then

a. What will be the equilibrium price and equilibrium quantity?
b. What situation will arise if the price in the market happens to be Rs.6?

c. What situation will arise if the price in the market happens to be Rs.4?

Answer: -

a. In a competitive market structure, the equilibrium price and quantity is
determined at the point where market demand is equal to market

supply. i.e. =
=>25 − 2. = 3.
=>25 = 3. + 2.
=>25 = 5.
25
=> = = 5 i.e. the equilibrium prices.
5

When P =Rs.5, then = 25 − 2 × 5 = 15 i.e. the equilibrium
quantity as quantity supplied at this price is also = 3 × 5 = 15.

b. When P = Rs.6, then = 25 − 2 × 6 = 13.

When P = Rs.6, then = 3 × 6 = 18.

If the price happens to be Rs.6 then it will create excess supply situation
in the market by 18 − 13 = 5 units.

c. When P = Rs.4, then = 25 − 2 × 4 = 17.

When P = Rs.4, then = 3 × 4 = 12.

If the price happens to be Rs.4, then it will create excess demand
situation in the market by 17 − 12 = 5 units.