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 - 3P and the market supply for bread is given by: S 8+2P.

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

Question 1

Answer (a)

At equilibrium demand is equal to supply

25 – P = -20 +4P

5 P = 45

P = 9

Substituting the value of P in the demand equation

Quantity = 25 - 9 = 16 units

Answer (b)

If the price of the bread is set at $10 per loaf

Quantity Demanded      = 25 – P

                                       = 25 -10

                                      = 15

Quantity Supplies = -20 + 4P

                             = -20 + 4 *10

                             = -20 + 400

                             = 380

There will be a surplus in the market the quantity demanded will decrease for 16 units to 15.

Answer (c)

If the market price is set at $7 per loaf

Quantity Demanded      = 25 – 7

                                       = 25 -7

                                      = 18

Quantity Supplies = -20 + 4P

                             = -20 + 4 *7

                             = -20 + 28

                             = 8

When the price decreases the quantity demanded increases but there is no motivation for the supplier to sell as it is not making profit and hence it will decrease the supply.

Question 2

Answer (a)

At equilibrium demand is equal to supply

48 – 3P = 8 +2P

5 P = 40

P = 8

Substituting the value of P in the demand equation

Quantity = 8 + 2*8 = 8 + 16 = 24 units

Answer (b)

If the price of the bread is set at $10 per loaf

Quantity Demanded      = 48 – 3P

                                       = 48 -3*10

                                      = 18

Quantity Supplies = 8 + 2P

                             = 8 + 2 *10

                             = 28

There will be a surplus in the market the quantity demanded will decrease for 18 whereas quantity supplied 28.

Answer (c)

If the market price is set at $6 per loaf

Quantity Demanded      = 48 – 3*6

                                       = 48 - 18

                                      = 30

Quantity Supplies = 8+2P

                             = 8 + 12

                             = 20

When the price decreases the quantity demanded increases but there is no motivation for the supplier to sell as it is not making profit and hence it will decrease the supply.