1: Assume that demand for a commodity is represented by the equation P = 10 – 0.

2 Q d, and
supply by the equation P = 2 + 0.2 Qs where Qd and Q s are quantity demanded and quantity
supplied, respectively, and P is the Price. Use the equilibrium condition Qs = Qd ,
.2QD = 10 – P

Divide both sides of the equation by .2

QD =50-5P

Also

.2QS = -2+ P

Divide both sides of the equation by .2

QS= -10+5P

1: Solve the equations to determine equilibrium price.

Now since equilibrium occurs where QD = QS, we can solve for the price that does this by setting
the functions equal to each other:

QD = QS

QD =50-5P = -10+5P

Now we will isolate the "P" term, so we can solve for equilibrium price. We’ll do this step-by-
step by algebraic manipulation:

50 + 10 – 5P = 5P

60-10 P=0

P= 6$

2: Now determine equilibrium quantity.

We know that the equilibrium price in the market, the price that causes quantity demanded to be
equal to quantity supplied, is $6. Now that we know this important piece of information, we can
find out what quantity is traded in the market. Since at P = $6, both quantity demanded and
quantity supplied are the same simply because of the definition of equilibrium, we can find the
quantity traded in the market by using either the demand or the supply function. To find
equilibrium quantity, we simply plug the equilibrium price into the demand function and find
equilibrium quantity demanded.

QD =50-5P

 QD = 50 – 5 ($6)

QD = 50 – 30 = 20 units of the commodity.

3: Graph the two equations to substantiate your answers and label these two graphs as D1 and
S1.

When price = Quantity demanded =

$8 10

$6 20

$4 30

$2 40

When price = Quantity supplied =

$8 30

$6 20

$4 10

$2 0

4: Furthermore; assume the demand for this product increases because of a change in income.
 $9
$8
$7
$6
Quantity supplied =
Axis Title

$5
$4 Linear (Quantity
$3 demanded)

$2 Linear (Quantity
supplied =)
$1
$0
0 10 20 30 40 50
Axis Title

A: graph the new demand curve and label as D 2.

Assume that as a result of increase in income the new equation for demand is this:

QD =60-5P

60 + 10 – 5P = 5P

70 = 10P

P=7

Now we find the equilibrium quantity by substituting the value of $7 in the equation for
quantity demanded:

QD =60-5P

=60 -5*7

= 25 units of commodity
 When price = Quantity demanded =

$8 20

$6 30

$4 40

$2 50

$9
$8
$7
$6
Axis Title

$5 DEMAND
$4 SUPPLY
$3 Linear (DEMAND)
$2 Linear (SUPPLY)
$1
$0
0 20 40 60
Axis Title

New Equilibrium at a higher price

B: What will be the new equilibrium price and quantity compare to the initial one.

The demand curve will shift towards right as a result of an increase in incomes. The quantity
supplied will increase with an increase in the price of the commodity. Equilibrium will be
 restored at a higher price and at that price the quantity supplied will be higher at a higher price.

C.Is this product normal good or inferior good?

This is a normal good as the quantity demanded for the good increases with the increase in
household incomes. Conversly the demand for inferior goods decreases with increase in
incomes.

2: Discuss the characteristics of monopolistic competitive market in detail. Name five different
companies that belongs to this market. Compare and contrast monopolistic competitive market
with Oligopoly. Illustrate how natural Gas market is related to the above markets and why its
price is rising these days.
Characteristics of Monopolistic Competition
Key attributes of monopolistic completion are:

 A relatively large number of sellers

 Differentiated products
 Easy entry and exit from the industry

Relatively Large Number of Sellers:

 Small Market Shares: Each firm has a small percentage of the total monopolistic market and
thus has only limited control over market price.
 No Collusion: A relatively large number of firms will not combine to restrict outputs and set
prices. With so many firms, collusion is almost impossible because it is too easy for one firm to
cheat and charge the lower price.
 Independent Action: Each firm is independent and can determine its pricing policy without
considering its rivals. eg. A firm could moderately increase its sales by cutting its prices, but that
would have no significant effect on its competitor’s sales.

Differentiated Products:
Generally, firms are "price makers" since each firm owns such a small percentage of the total
market; if a firm changed the pirce of their product, there would not be much of an effect on
the market.
 The firms in monopolistic competition will differentiate their products and make them more
appealing to the customers in order to maximize their profits.

Easy Entry and Exit:

 In the short run, a firm may obtain economic profits or losses.
 However, since there are little barriers from preventing companies to enter or leave the
industry, in the long run, the firms will only obtain normal profits.

Advertising:
 A unique feature of a monopolistic competitive market is that there are product
differentiations.
 Therefore, companies rely on advertising to flaunt their products and try to get consumers to
buy their product over another.
 Goal of product differentiation and advertising (non price competition) is to make price less of
a factor in consumer purchases and make product differences a greater factor.
 A successful advertisement would shift the firm's demand curve to the right and make demand
more inelastic.

Examples of Companies operating in monopolistically competitive markets:

1. Apple computer
2. Amazon.com
3. Whole foods markets
4. Abercrombie and Fitch
5. Kellogg