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ECO401 Assignment 1 Solution

The document provides the answers to three questions regarding market equilibrium for a product sold by d Mart: 1) It calculates the equilibrium price as Rs. 20 and equilibrium quantity as 700 units by setting the supply and demand functions equal to each other. 2) It calculates the price elasticity of supply using the point elasticity formula, finding it to be 0.5714, indicating inelastic supply. 3) It states that if d Mart improves technology, reducing production costs, the supply will increase as the supply curve shifts rightward, resulting in a lower equilibrium price and higher equilibrium quantity.

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A Jawad
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2K views

ECO401 Assignment 1 Solution

The document provides the answers to three questions regarding market equilibrium for a product sold by d Mart: 1) It calculates the equilibrium price as Rs. 20 and equilibrium quantity as 700 units by setting the supply and demand functions equal to each other. 2) It calculates the price elasticity of supply using the point elasticity formula, finding it to be 0.5714, indicating inelastic supply. 3) It states that if d Mart improves technology, reducing production costs, the supply will increase as the supply curve shifts rightward, resulting in a lower equilibrium price and higher equilibrium quantity.

Uploaded by

A Jawad
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Bc190402760

ECO401 Assignment 1
Fall 2020

Question 1:
Qd =1900- 60P , Qs = 300 + 20P

a. Calculate the market equilibrium level of price

and quantity.

We know that Equilibrium is the point where

Qd = Qs

1900- 60P=300 + 20P

1900-300=20P+60P

1600=80P

P=1600/80

P= Rs.20

Put the price value in the demand function for equilibrium

Qd=1900-60P
=1900-60(20)

= 1900-1200 = 700

Put the price value in the supply function for equilibrium

Qs = 300 + 20P

= 300+20(20) =300+400=700

Therefore market equilibrium of P=20 and

Quantity=Qs=Qd=700.

b. Calculate price elasticity of supply using point

elasticity method when d Mart is in equilibrium and

interpret the result.

Price elasticity of supply using point elasticity

By the formula of Point elasticity

E= dQ/dP * P/Q

Since P and Q are equilibrium Price & quantity

Given that

Qs=300+20P

Taking derivative w.r.t “P”


We get,

dQs/dP= d/dp(300+20P)

=d/dP(300)+d/dP(20P)

= 0+20

dQ/dP=20

As

dQs/dP=20, P=20, Q=700

By Putting values in formula,

E=20*20/700

=0.5714

As Supply is point inelastic which means one rupee change in price cause 0.5714 unit change in
Qs.

c) What will happen to supply, equilibrium price and equilibrium quantity of a packet of
Surf excel if d Mart improves technology?

If d Mart improves technology, equilibrium price will be reduced and equilibrium quantity will be
increased. Due to reduced in cost of production, the supply will be increase. Efficiency increases
and the supply curve shift rightward.

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