Consider the following equations, where q denotes quantity in thousands and p de

Question

Consider the following equations, where q denotes quantity in thousands and p denotes price in dollars: 60p-q-120 80p + q-960 0 0 Express p as a function of q in each of the above equations. Identify which is the supply and which is the demand function and briefly explain your reasoning. a. (3 marks) b. Graph the supply and demand functions in the region q 2 0,p20.(4 marks) C. d. Find the equilibrium price and quantity in this market. Suppose the government introduces a subsidy in this market (ie. opposite of a tax). If a subsidy of $2 is provided to consumers, find the new equilibrium price and quantity in this market. Plot this on a new graph. Determine the consumer's total expenditure in this market after the subsidy. (5 marks) (6 marks)

Explanation / Answer

'p' is price in dollars and 'q' is quantity in thousands;
We know that for demand side, as price increases, quantity decreases
For supply side, as price increases, the quantity increases too;

Equation 1: 60p - q - 120=0;
so 60p = 120+q
p = (120+q)/ 60 = 2 + q/60;
Thus, for equation 1: p = 2 + q/60;
Here we see that as p increases, q too has to increase; Thus, equation 1 is the supply side equation;

For equation 2: 80p + q - 960=0;
80p = 960-q
p = (960-q) / 80 = 12 - q/80;
Here we see that as 'p' increases, q has to decrease so equation 2 is the demand side equation ;

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