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Consider the following demand and supply function of the commodity : Q^(D)=200-P" ,Q"^(D)=120+P (i) Calculate equilibrium price. (ii) Calculate equilibrium quantity (iii) Which situation arises when market price is Rs.25 ? (iv) Which situation arises when market price is Rs.45 ?

Answer» <html><body><p></p>Solution :Equilibrium price is <a href="https://interviewquestions.tuteehub.com/tag/determined-949906" style="font-weight:bold;" target="_blank" title="Click to know more about DETERMINED">DETERMINED</a> at that <a href="https://interviewquestions.tuteehub.com/tag/point-1157106" style="font-weight:bold;" target="_blank" title="Click to know more about POINT">POINT</a> where market demand is equal to market supply i.e., <br/> `Q^(D)=Q^(S)` <br/> `200-P=120+P` <br/> `2P=80""rArr"P"=(80)/(<a href="https://interviewquestions.tuteehub.com/tag/2-283658" style="font-weight:bold;" target="_blank" title="Click to know more about 2">2</a>)=<a href="https://interviewquestions.tuteehub.com/tag/40-314386" style="font-weight:bold;" target="_blank" title="Click to know more about 40">40</a>` <br/> `therefore` Equilibrium price is Rs.40. <br/> (ii) The equilibrium quantity is calculated by substituting the equilibrium price info either demand or supply function, since at equilibrium, quantity demanded and quantity supplied are equal. <br/> `Q^(D)=200-P=200-40=160"units"` <br/> `Q^(S)=120+P=120+40=160"units"` <br/> (iii) When market price is Rs.25 then <br/> `Q^(D)=200-P=200-25=175"units"` <br/> `Q^(S)=120+P=120+25=145"units"` <br/> `Q^(D)gtQ^(S)` <br/> `175gt145` <br/> This is a situation of excess demand or shortage of supply because `Q^(D)gtQ^(S)` <br/> (<a href="https://interviewquestions.tuteehub.com/tag/iv-501699" style="font-weight:bold;" target="_blank" title="Click to know more about IV">IV</a>) When market price is Rs.45, then <br/> `Q^(D)=200-P=200-45=155"units"` <br/> `Q^(S)=120+P=120+45=165"units"` <br/> `Q^(D)ltQ^(S)` <br/> `155lt165` <br/> This is a situation of excess supply or surplus becuase `Q^(D)ltQ^(S)`.</body></html>


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