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Gobbet_4_Market_Equilibrium_Solution__Problem_Set

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Gobbet #4: Market Equilibrium (These problems are adapted from Callan and Thomas: Environmental Economics and Management , 2004) Recall the demand and supply schedules for bottles of water in Gobbets 2 & 3 PRICE (P) Quantity Demanded by Consumers (bottles/month) Quantity Supplied by Producers (bottles/month) $0.50 1,100 100 1.00 1,050 300 1.50 1,000 500 2.00 950 700 2.50 900 900 3.00 850 1,100 3.50 800 1,300 4.00 750 1,500 4.50 700 1,700 5.00 650 1,900 The equations representing demand, inverse demand, supply and inverse supply are as follows: Demand: Q d = - 100P + 1,150 Inverse Demand: P = - 0.01 Q d + 11.5 Supply: Q s = 400 P - 100 Inverse Supply: P = 0.0025 Q s + .25 Using this information, determine the equilibrium price and quantity for bottled water in this market. Explain what will happen in the market if price equals $4.00. What will happen if price equals $2.00? Solution: The easiest way to find the equilibrium price and quantity is to inspect the table. You can see that at a price of $2.50, the quantity supplied (900) equals the quantity demanded (900). This is the condition for market equilibrium – supply equals demand.
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So the equilibrium price is $2.50 and the equilibrium quantity is 900 bottles. You can see this by combining the graphs for supply and demand. The point of intersection between supply and demand is the market equilibrium. A straight line from
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