1 Assume that the market for bread is perfectly competitive

1 )Assume that the market for bread is perfectly competitive. The demand for bread is given by the equation: D 25 P and the market supply for bread is given by: S -20 4P.

a.Determine the equilibrium price and quantity of bread.

b.What happens if the price of the bread is set at $10 per loaf?

c.What happens if the market price is set at $7 per loaf?

2) Assume that the market for bread is perfectly competitive. The demand for bread is given by the equation: D 48 P and the market supply for bread is given by: S 8P.

a.Determine the equilibrium price and quantity of bread.

b.What happens if the price of the bread is set at $10 per loaf?

c.What happens if the market price is set at $6 per loaf?

Solution

Assume that the market for bread is perfectly competitive. The demand for bread is given by the equation: D 25 P and the market supply for bread is given by: S -20 4P.

a.Determine the equilibrium price and quantity of bread.

This data is incorrect. Supply function is incorrect otherwise, it is determined as follows:

Equilibrium price is determined where Quantity demandd = quantity supplied

25P = 20+15P

10P = 20

P = 20/10 = $2

quantity = 25(2) = 50 units.

If price is determined above equilibrium price, there will be excess supply i.e. quantity demanded will be less than quantity supplied. It can be verified by putting values of P in demand and supply function.

If price is determined at a price less than equilibrium price, there will be excess demand i.e. quantity demanded will be more than quantity supplied.

b.What happens if the price of the bread is set at $10 per loaf?

c.What happens if the market price is set at $7 per loaf?