In a hypothetical economy, suppose the following equations describe the demand a
ID: 1247614 • Letter: I
Question
In a hypothetical economy, suppose the following equations describe the demand and supply for DVDs:D = 280 - 20P
S = 40P - 240
where S is quantity supplied, D is quantity demanded, both measured in thousands of DVDs and P is the price per DVD. Let Q denote the quantity measured in thousands of DVDs.
Solved: Q= 106.66 and P= 8.667
A. How much money do people spend on DVDs?
B. The entertainment industry is successful in getting the government to impose a price floor of $10 per player. How does this affect the market? Illustrate on your diagram and provide a specific numerical measure of the induced shortage or surplus of DVDs.
Explanation / Answer
A) Money people spend on DVDs=P*Q=106.66*8.667=$924.42 B) At P=10, suppliers are willing to supply 40*10-240=160 DVDs Demanders however only want 280-20*10=80 Since the quantity supplied is greater than the quantity demanded, there will be a surplus. The size of the surplus=160-80=80 To graph this, draw a graph with the supply and demand curves describes above. Draw a horizontal line at P=10. This line will be your price floor. The intersection of the price floor with the supply curve will be the quantity supplied. The intersection of the price floor with the demand curve will be the quantity demanded. The distance between those two intersections is your surplus.
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