Supply and Demand

Topics: Supply and demand / Pages: 25 (4766 words) / Published: Mar 4th, 2015
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The demand curve for product X is given by QXd = 500 - 5PX.

a. Find the inverse demand curve.

PX = 100 - 0.2 QXd

Instructions: Round your answer to the nearest penny (2 decimal places).

b. How much consumer surplus do consumers receive when Px = $45?

$91.00

c. How much consumer surplus do consumers receive when Px = $25?

$95.00

d. In general, what happens to the level of consumer surplus as the price of a good falls?

The level of consumer surplus increases as the price of a good falls.

ebook & resources
Demand
Market Equilibrium
Worksheet
Learning Objective: 02-02 Calculate consumer surplus and producer surplus, and describe what they mean.

The demand curve for product X is given by QXd = 500 - 5PX.

a. Find the inverse demand curve.

PX = - QXd

Instructions: Round your answer to the nearest penny (2 decimal places).

b. How much consumer surplus do consumers receive when Px = $45?

$

c. How much consumer surplus do consumers receive when Px = $25?

$

d. In general, what happens to the level of consumer surplus as the price of a good falls?

The level of consumer surplus increases as the price of a good falls.

Explanation:
a. Solve the demand function for Px to obtain the following inverse demand function: PX = 100 - 0.2QXd.

b. Notice that when Px = $45, QXd = 500 - 5(45) = 275 units. Also, from part a, we know the vertical intercept of the inverse demand equation is 100. Thus, consumer surplus is $7,562.50 (computed as (0.5)($100 - $45)275 = $7,562.50).

c. When price decreases to $25, quantity demanded increases to 375 units, so consumer surplus increases to $14,062.50 (computed as (0.5)($100-$25)375 = $14,062.50).

d. So long as the law of demand holds, a decrease in price leads to an increase in consumer surplus, and vice versa. In general, there is an inverse relationship between the price of a product and consumer surplus.
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