Economics Assignment: Market Equilibrium, Pricing and Profit Analysis

This economics assignment addresses two key problems: determining market equilibrium under perfect competition and optimizing pricing strategies for a transport authority. The first problem calculates the equilibrium price and quantity by equating market demand and supply, revealing an excess supply scenario where firms effectively pay customers to take the output. It also considers the impact of firms exiting the market. The second problem focuses on profit maximization for a transport authority, determining optimal toll charges for off-peak users using marginal cost and revenue analysis. It then analyzes toll charges during peak hours when bridge capacity is reached, concluding that off-peak users should be charged while peak users should use the bridge for free. Desklib provides access to this and other solved assignments.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the university
Name of the student
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................3
Reference:..................................................................................................................................6

2ECONOMICS ASSIGNMENT
Answer 1:
The market demand (QD): Qd =150,000,000 -5,000,000P
The market supply (QS): Qs = 50,000,000 -10,000,000P
Under perfect competition, equilibrium market price and quantity can be obtained by
equating the market demand and supply curve (Stiglitz, Yun and Kosenko 2017).
a) the equilibrium market price and quantity
Qd = Qs
150,000,000 -5,000,000P = 50,000,000 -10,000,000P
10,000,000P - 5,000,000P = 50,000,000 - 150,000,000
5,000,000P = - 100,000,00
P = -20
Putting this value in market demand equation:
Q = 250,000,000
The equilibrium market price is -20 and the equilibrium amount of quantity is
250,000,000
b)
In part a, the equilibrium market price is showing by a negative value, which implies
that the market has excess supply of output by the amount 250,000,000. Hence, under perfect
competition, to sale this excess amount, each firm needs to pay 20 to their customers (Chen
and Zhang 2018). Here, total number of identical firms is 10,000.

3ECONOMICS ASSIGNMENT
Hence, output of each firm = 250000000/10000
 output of each firm = 25000
Thus, each firm has 25000 amount of excess output which they will sell to their
customers by paying them 20 amount of price.
c)
Under perfect competition, the amount of total market supply is going to be decreased
if a firm goes out from the industry (Karagiannis, Kellermann, Pröll and Salhofer 2018). As a
consequence, the amount of excess market supply will be reduced, which in turn, will help
each firm to provide less amount of equilibrium price to its customers.
Answer 2:
To maximise profit, the Transport Authority needs to charge a consistent price from
off-peak drivers by applying first order profit maximising condition.
Here, marginal cost (MC) = marginal revenue (MR)
For off-peak users, the total revenue (TR) equation is:
TRop = Top* Qop
TRop = (2.5-0.025Qop)* Qop
TRop = 2.5 Qop - 0.025 Qop2
MRop = d TRop/ d Qop
MRop= 2.5- 2*0.025 Qop

4ECONOMICS ASSIGNMENT
Now, to obtain the value of Qop, it is essential to equate marginal revenue with
marginal cost
MRop = MCop
2.5 - 0.05 Qop = 5
0.05 Qop = 2.5-5
Qop = -50
Putting this value into the demand equation of off-peak, the amount of toll charged
from off-peak automobile users can be obtained.
Top = 2.5-0.025Qop
Top= 2.5 - 0.025*(-50)
Top= 2.5+ 1.25
Top = 3.75
When, the capacity of the bridge is 100 automobiles per minute, the marginal cost has
vertically slopped.
Putting bridge capacity into the demand equation of peak, the value of toll can be
generated, which needs to be charged from automobile users during peak.
Tp = 5-0.05Qp
Tp= 5- 0.05*100
Tp= 5-5
Tp= 0

5ECONOMICS ASSIGNMENT
Thus, the authority should charge $ 3.75 from off-peak users while there is not charge
for peak users of the bridge (Grimm, Schewe, Schmidt and Zöttl 2017). This implies that, at
peak person, another bridge has opened for automobile users.

6ECONOMICS ASSIGNMENT
Reference:
Chen, Y. and Zhang, T., 2018. Entry and welfare in search markets. The Economic
Journal, 128(608), pp.55-80.
Grimm, V., Schewe, L., Schmidt, M. and Zöttl, G., 2017. Uniqueness of market equilibrium
on a network: A peak-load pricing approach. European Journal of Operational
Research, 261(3), pp.971-983.
Karagiannis, G., Kellermann, M., Pröll, S. and Salhofer, K., 2018. Markups and product
differentiation in the German brewing sector. Agribusiness, 34(1), pp.61-76.
Stiglitz, J.E., Yun, J. and Kosenko, A., 2017. Equilibrium in a Competitive Insurance Market
Under Adverse Selection with Endogenous Information (No. w23556). National Bureau of
Economic Research.