Question 2: Equilibrium price

Running Head: Managerial Economics
Managerial
Economics
University Name
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Managerial Economics
Contents
Question 2:.................................................................................................................................2
Question 3:.................................................................................................................................6
Question 4:...............................................................................................................................12
Question 5:...............................................................................................................................14
Question 6:...............................................................................................................................16
Question 7:...............................................................................................................................19
References:...............................................................................................................................21
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Managerial Economics
Question 2, 3, 4, 5, 6 and 7 are attempted out of the given seven questions.
Question 2:
(A) The equilibrium price is the price that equates market demand of the product with its
market supply (Graham, 2017). The quantity at this equilibrium price is the equilibrium
quantity.
Demand, Q 1000-250P
Supply, Q 150P
P is the price per bag of potatoes and Q is the number of bags per month.
Equilibrium Price, Demand = Supply 1000-250P = 150P
Or 400P = 1000
Or P = 1000/400 = 2.5 Price per bag
Equilibrium Quantity is found by
using equilibrium price of 2.5 in
demand or supply equation.
1000 – 250P = 1000-250(2.5) = 375 bags per
month
150P = 150(2.5) = 375 bags per month
Number of bags per month Demand Curve, P=
(1000-Q)/(250)
Supply Curve,
P= Q/150
0 4.00 0.00
75 3.70 0.50
150 3.40 1.00
225 3.10 1.50
300 2.80 2.00
375 2.50 2.50
450 2.20 3.00
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Managerial Economics
525 1.90 3.50
600 1.60 4.00
675 1.30 4.50
750 1.00 5.00
825 0.70 5.50
900 0.40 6.00
975 0.10 6.50
(B) Consumer surplus is gain to the consumers because some consumers will be able to
purchase the product at lower price than the price they were willing to pay (Perloff and
Brander, 2017).
Maximum Consumer Surplus for a consumer =
Maximum Price consumer is willing to pay -
Equilibrium Price
4-2.5 = 1.5 1.50
or Total Consumer Surplus (area of the red
triangle) = (1/2)*(Equilibrium
Quantity)*(Maximum price consumer is willing
(1/2)*(375)*(4-2.5) 281.25
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Managerial Economics
to pay - Equilibrium Price)
(C) Producer surplus is the gain to the producer as they will be able to sell product at a price
higher than the price they were willing to sell (Perloff and Brander, 2017).
Maximum Producer Surplus for a supplier =
Equilibrium Price - Minimum Price at which
supplies is willing to sell
2.5-0 2.50
or Total Producer Surplus (area of the blue
triangle) = (1/2)*(Equilibrium
Quantity)*(Equilibrium Price-Minimum Price
at which supplies is willing to sell)
(1/2)*(375)*(2.5-0) 468.7
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Managerial Economics
(D) Following reasons can increase the demand for the potatoes (BC campus, n.d.):
(1) Increase in the price of substitutes that is other sources of simple carbohydrates like white
bread, pasta and rice.
(2) Increase in the population will increase the overall demand for food items.
(3) Change in consumers attitude or taste in favour of potatoes due to new research showing
the benefits of potatoes due to high potassium and vitamin C content and use of potatoes by
athletes as fast absorbing carbohydrates post exercise.
(E) Following reasons can decrease the supply of the potatoes (BC campus, n.d.):
1) Decrease in the production of potatoes due to decrease in total farming land because of
construction and due to decrease in number of farmers or due to extreme weather conditions.
(2) Increase in the price of inputs required for potatoes faming like pesticide, fertilizer or
electricity/water costs.
(3) Increase in the price of any other farming substitute in production like wheat or corn.
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