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Homework answers / question archive / Consider a market characterized by the following inverse demand and supply functions: PX = 10 - 2QX and PX = 2 + 2QX
Consider a market characterized by the following inverse demand and supply functions: PX = 10 - 2QX and PX = 2 + 2QX. A $4 per unit price floor will result in a
Consider a market characterized by the following inverse demand and supply functions: PX = 10 - 2QX and PX = 2 + 2QX. A $4 per unit price floor will result in a
At equilibrium, QS = QD
Hence,
10 - 2QX = 2 + 2QX
-2QX - 2QX = 2-10
-4QX = -8
QX = 2
Hence equilibrium quantity = 2 units
Substitute 2 in any of the equation to get the equilibrium price
PX = 10 - 2QX
But QX = 2
Hence, PX = 10 - 2(2)
PX = 6
Hence equilibrium price = $6
A $4 per unit price floor will result in a
A price floor of $4 is below the equilibrium price ($6), therefore it is a nonbinding price floor (ineffective price). The forces of supply and demand will naturally move the market to the equilibrium.