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Perfect competition is a model of the market that assumes all of the following EXCEPT
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A store selling stationery supplies sells 50 pens at the equilibrium price. The supply curve
for pens is given by QS = 40 + 6P. At the market equilibrium, the own price elasticity of the demand for
pens is estimated to be -6.5. Using the provided information answer the following questions:
[4] a) Derive the linear demand curve for pens.
[2] b) Suppose now that due to higher input prices, the supply curve for pens shifts to QS = 30 + 6P.
Assuming that the demand curve is unaffected, what is the new equilibrium price and quantity in the pen
market?
[5] c) Suppose that the government sets a price of $1.70 per pen. Using the supply curve from (b) and the
demand curve derived in (a) calculate the quantity demanded and quantity supplied at the government set
price. Is there a shortage or surplus at the government price? How big is it? In a diagram with price of
pens on the vertical axis and quantity of pens on the horizontal axis, graph both curves and clearly
indicate the equilibrium price and quantity from (b) and the shortage or surplus due to government
intervention.
A store selling stationery supplies sells 50 pens at the equilibrium price. The supply curve
for pens is given by QS = 40 + 6P. At the market equilibrium, the own price elasticity of the demand for
pens is estimated to be -6.5. Using the provided information answer the following questions:
[4] a) Derive the linear demand curve for pens.
[2] b) Suppose now that due to higher input prices, the supply curve for pens shifts to QS = 30 + 6P.
Assuming that the demand curve is unaffected, what is the new equilibrium price and quantity in the pen
market?
[5] c) Suppose that the government sets a price of $1.70 per pen. Using the supply curve from (b) and the
demand curve derived in (a) calculate the quantity demanded and quantity supplied at the government set
price. Is there a shortage or surplus at the government price? How big is it? In a diagram with price of
pens on the vertical axis and quantity of pens on the horizontal axis, graph both curves and clearly
indicate the equilibrium price and quantity from (b) and the shortage or surplus due to government
intervention.