Suppose the market demand and supply functions are QD = 180 – 1.5P and QS = 3.5P

Question

Suppose the market demand and supply functions are QD = 180 – 1.5P and QS = 3.5P + 40. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product.

a. Determine the equilibrium price and quantity in this market.

b. You’ve researched and found that most firms in the market currently experience costs such that TC = 15 + 45Q – 10Q2 + 1.5Q3. Determine whether or not you should enter this market. Use graphs to support your answer.

c. Due to unforeseen delays, you don’t enter the market. However, a year later the market supply has changed to QS = 3.5P + 10. Are you surprised at this shift in supply?

d. Given the new supply conditions, determine whether or not you should enter the market.

Explanation / Answer

a). Solution :- At an equilibrium level, Demand = Supply.

180 - 1.5 P = 3.5 P + 40

180 - 40 = 3.5 P + 1.5 P

140 = 5 P

P = 140 / 5

P = $ 28.

Q = 180 - 1.5 * 28 = 138 Units. (Put the value of P = 28 in the market demand function to calculate the equilibrium quantity.)

Conclusion :- Equilibrium price (P) = $ 28 and Equilibrium quantity (Q) = 138 units.

b). Answer :- The new firm should not enter the market because total cost will be more than total revenue for the new firm. Accordingly, it would be very difficult to survive for the new firm in the perfectly competitive market.

c). Answer :- Supply has decreased significantly after a year in the given question. There is no surprise to see the significant shift in supply curve in the leftward direction because the decrease in supply may be due to various reasons including technological change, change in government policy (from subsidy to taxation), change in goal of firm (sales maximization to profit maximization), decrease in number of firms in market etc.

d). Answer :- New firm should enter the market with the new supply conditions given in the question.

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