Question

a retail chain buys 1000 wireless speakers if the price is $190 and $2600 if the price is $110. A wholesaler will supply 800 wireless speakers at $128 each and 2400 at $192. Assuming that the supply and demand functions are linear, find the market equilibrium price and market equilibrium quantity

Answer 1

The market equilibrium price is $160 and market equilibrium quantity is 1600

Explanation:

A linear function is of the form y = m * x + b, where m is the slope and b is called the intercept.

The shape of a demand and supply curve will be: Q = m * P + b

The point-slope form of the linear function is written as y- y1 = m * (x- x1) where (x, y) and (x1, y1) are the coordinates of the point. In this case: Q- Q1 = m * (P- P1)

A retail chain buys 1000 wireless speakers if the price is $ 190 and 2,600 if the price is $ 110. Then (P, Q) = (190,1000) and (P1, Q1) = (110, 2600). Replacing in the point-slope form:

1000 - 2600= m*(190 - 110)

and solving for m you get:

-1600=m*80

`m=(-1600)/(80)`

m= -20

To find the value of b from the demand curve Q = m * P + b, you plug in the value of m and either of the two points into the equation and solve for b. So:

Q= -20*P + b

Replacing (P, Q) = (190,1000)

1000= -20*190 + b

1000= -3800 + b

1000 + 3800= b

4800= b

The demand function is Q= -20*P + 4800

In an analogous way, the supply function can be deduced. A wholesaler will supply 800 wireless speakers at $128 each and 2400 at $192. Then (P, Q) = (128,800) and (P1, Q1) = (192, 2400). Replacing in the point-slope form:

800 - 2400= m*(128 - 192)

and solving for m you get:

-1600=m*(-64)

`m=(-1600)/(-64)`

m= 25

To find the value of b from the supply curve Q = m * P + b, you plug in the value of m and either of the two points into the equation and solve for b. So:

Q= 25*P + b

Replacing (P, Q) = (128,800)

800= 25*128 + b

800= 3200 + b

800 - 3200= b

-2400= b

The supply function is Q= 25*P - 2400

The point where the supply and demand curves intersect is called the market equilibrium point. At this point the quantity supplied and the quantity demanded is the same and the price must also be the same. So:

-20*P + 4800= 25* P -2400

Solving for P:

-20*P - 25*P= -2400 - 4800

-45*P= -7200

`P=(-7200)/(-45)`

P= 160

Since at the equilibrium point the quantity supplied and the quantity demanded is the same, replacing the price P in either of the two functions (demand or supply) I obtain the equilibrium quantity. In this case, it is replaced in the supply function:

Q= 25*160 -2400

Q= 1600

Finally, the market equilibrium price is $160 and market equilibrium quantity is 1600