Quiz 1

Q:  Demand is given by P=150-3Q and Supply is given by P=2Q+10.  Find Pe and Qe and determine the impact of a technological innovation on consumer surplus.

A:  To find the equilibrium we need to set the prices equal or the quantities equal.  Given the form of supply and demand it is easier to set the prices equal.  We have 150-3Q=2Q+10 or 140 = 5Q or Qe=28.  We can plug this into either supply or demand to find Pe;  Pe = 2Q+10=2(28)+10=66.  

For the second part of the problem we first need to figure out what impact a technological improvement will have on the market.  The innovation will cause supply to shift out which will lower the price and increase quantity.  Notice that the demand curve is unchanged.  Hence people who bought before the innovation will still buy but will pay less so this is an increase in consumer surplus.  Also, new people will be able to buy units that are less costly than valuable; hence, consumer surplus will increase.