Solved: 1 The following relations describe demand and

supply Q
1 The following relations describe demand and supply Q

1. The following relations describe demand and supply.

Q = 700 - 100P (1)
Q = -100 + 100P (2)
Where P is price in dollar and Q is quantity in unit.
a. Which equation (1) or (2), is demand equation and why? Answer the same for supply
equation. And then find equilibrium (market clearing) P and Q algebraically and show them on
graph. Free hand will do as long as you identify clearly market clearing P and Q on it.
b. What would be the quantity demanded and the quantity supplied when P = $2 instead of
market clearing P and Q in (a).
c. What would happen to price in (b) (i.e., rise or fall) in view of the market clearing price you
obtained in (a) and why?
d. Suppose this is prescription drug that a terminally ill patient needs. If the patient can pay only
$2 per pill, not the market clearing price, what would be the down side of free market system in
this situation?
e. What would be the quantity demanded and the quantity supplied when P = $6?
f. What would happen to price in (e) (i.e., rise or fall) in view of the market clearing price you
obtained in (a) and why?
g. If the product in question is wheat, what would happen to the farmer who can barely eke out
living only at P = $6 after covering cost?
h. At what price would quantity demanded be zero and at what price would quantity supplied be
zero?
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?
j. Calculate the price when quantity demanded is 100 units and also the price when quantity
supplied is 100 units.
k. Plot the price for 100 units buyers are willing to pay and the price for 100 units sellers are
willing sell on the same diagram in (a). Would the quantity of 100 units be sold given the market
clearing P and Q you got in (a)? The fact that quantity 100 exceeds market clearing Q is not the
answer. Provide numerical support for your answer. How about 200 units? Would 200 units be
sold? Provide the numerical support for your answer. What is the difference in your numerical
supports for the case of 100 units and 200 units?
l. It was reported that someone paid more than $1,000 for a grilled cheese looking like Virgin
Mary on eBay. Explain why eBay emerged using the same rationale you used in your answer in
(k). Ability to get the best deal is not the answer since it could happen at any yard sales on
weekend.
m. Using the price you got in (j) for the quantity demanded of 100, calculate the quantity
supplied at that price. Using the price you got for the quantity supplied of 100 in (j), calculate the
quantity demanded at that price this time. Explain why the quantity you obtained above would
not be sold given the market clearing price and quantity you obtained in (a). Provide numerical

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support for your answer.
The fact that the quantity in question exceeds market clearing quantity is not the answer for this
question. You need to use the same logic in your answer in (k) in a reverse way.
n. Would there be a “buyer’s remorse” at Q = 100? How about at Q = 500? Provide numerical
support as in (k) and (m).
o. Explain why the market clearing price and quantity obtained in (a) is Pareto efficient whereas
your answers in (k) and (m) are Pareto inefficient. Explain Pareto’s inefficiency means using
numbers if you can.
p. Economists often use Pareto’s optimality in explaining the efficiency of market economy.
What would be the objection other social scientists to the economists use market efficiency as a
measure of improvement in welfare of a society? Give a specific example.
q. Suppose the demand for the product in question increases, which leads to a new demand
equation given below:
Qd = = 800 - 100P
Find the new market clearing price and quantity using new demand equation given above and
the old supply equation. Show the result in a graph along with the market clearing price and
quantity you obtained in question (a).
r. Compare the new market clearing price and quantity to the one in (a) and discuss how does
market eliminate the resulting disequilibrium (surplus or shortage). Also explain how sellers (or
producers) would make a short run adjustment in quantity so that the new market clearing is
achieved.
s. Below is the new (increased) supply equation. Find new market clearing price and quantity
using the new supply equation above and the new demand equation in (q).
QS = 100P
Compare the new market clearing price and quantity above to that in (q) and discuss
disequilibrium adjustment process in terms of long run adjustment by sellers (or producers).
t. Discuss the difference in the role of price in taking care of shortage/surplus in short run in (r)
v. scarcity/abundance in long run in (s).
u. Consider the movements of market clearing price from (a) to (q) and then to (s). What
implication(s) can you draw from the above price movements about the efficiency of market
economy described?
w. Please return to the original supply and demand equation at the beginning. Because of entry
of foreign suppliers into the market (i.e., an increase in number of suppliers in an open
economy), now supply curve shifted to:
Qs = 300 + 100P
Using the original demand equation and new supply equation above, find the new market
clearing price and quantity and compare them to (a) at the beginning of the question. What
happens to price and quantity demanded in this country and the quantity supplied by the
domestic suppliers in such an open economy? How much is imported?
x. Who benefits and who loses as a result of this open economy in this country focusing on this
economy and ignoring foreign countries. Is there any net gain as a result of open economy in
this country and why?
y. Explain how the impact of outsourcing covered in (w) is Pareto’s efficient in spite of negative
impact of outsourcing has on domestic suppliers above?
z. Suppose the original demand and supply equation at the beginning describe hypothetical
demand and supply equations of market for human organ (kidney). Because of moral
implication of such a human organ market, supply is limited in our society by voluntary donation,
which will be 100 kidneys in this case. This is the same number used in (k) earlier in the test.
What would be the benefits lost for kidney patients relying upon donated kidneys, which creates
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 perennial problem of kidneys shortage ignoring negative moral implication behind such a market
for human organ. Use some numbers or graph in your answer.

1 The following relations describe demand and supply Q

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