Question

Suppose the current price of a good is $130. At this price, the quantity supplied is 125 units, and the quantity demanded is 165 units. For every $1 increase in price, the quantity supplied increases by 2 units and the quantity demanded decreases by 2 units.At the current price, the quantity demanded isgreater than the quantity supplied. This means that the market is currently experiencing ashortage . In order to adjust, the market price willincrease until the quantity demanded and quantity supplied are equal. The result is an equilibrium quantity of ________ and an equilibrium price of ________

Answer 1

Answer:

Equilibrium quantity: 145

Equilibrium price: $140

Explanation:

In order to find the answer, first we determine the current difference between quantity supplied and quantity demanded.

Quantity supplied - quantity demanded = difference

125 - 165 = -40

So we have a shortage of -40 units.

We have the information that a $1 increase in price increases supply by 2, and decreases demand by 2. Thus, in order to close the shortage, we need a $10 price increase, because this will raise supply by 20 units, and lower demand by 20 units as well, bringing the 40 gap to 0.

For this reason, the equilibrium quantity is 145 units, and the equilibrium price is $140.