ECO401 _ Assignment 1

BC180202805

Case Data:
Demand function of urea:
Qd = 6500- 0.5P

Supply function of urea:

Qs = 500 + 2.5P

Question 1:
Find equilibrium price and equilibrium quantity of urea by using the given
Demand and supply functions.

Answer:
Equilibrium price = P=?
From equilibrium equation we can get equilibrium price
6500-0.5P = 500+2.5P
6500 – 500 = 0.5P + 2.5 P
6000 = 3P
6000/3 =  P
2000  =  P
Equilibrium price P= 2000

Quantity demanded of Urea: Qd =  6500 – 0.5P

As P =2000:
Qd = 6500-0.5(2000)
Qd  =  6500 – 1000
Qd   =  5500

Quantity supply of urea = QS = 500 + 2.5P

As P=2000: QS = 500+ 2.5 (2000)
QS   =   500 + 5000
QS  =    5500

Hence on Equilibrium price P = 2000 it is proved that  QS = Qd

Question 2:
Consider the data given in this part and identify whether urea market is in
Shortage, in equilibrium or in surplus situation at different price levels.

Answer:
Price (Rs. Quantity Quantity Identification
per bag of demanded supplied (Shortage/surplus/e
urea) (Number of bags (Number of quilibrium)
of urea) bags of urea)

1500 5750 4250 Shortage

1700 5650 4750 Shortage

2000 5550 5500 Equilibrium

2100 5450 5750 Surplus

Question 3:
Consider the data on prices and quantity demand of urea given in this part and
calculate price elasticity of demand if price of urea decrease from Rs. 2000 per
bag to Rs.1700 per bag.

Answer:
Price elasticity of demand ηp = ?
ηp = (ΔQ/Q) / (ΔP/P)

    = (ΔQ/Q)(P/ΔP)

    = (ΔQ/ΔP)(P/Q)

    = (ΔQ)(P) / (ΔP)(Q)

= (150)(2700) / (-300)(1150)
ηp = = -1.17