In a perfectly competitive market, assume demand and supply curve of commodity Z as follows:
qD = 500 - p,
qS = 350 + 2p.
Excess supply will exist at price of?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: 60
Equilibrium price is 500
p = 350 + 2p
350 = 2p + p
150 = 3p
50 = p
At any price greater than equilibrium price, i.e., price> 50, there will be excess supply. This can be confirmed by putting any price greater than 50 in both the equations equation of market demand and market supply.
Lets put p = 60.
Qd = 500
p = 500
60 = 440
Qs = 350 + 2p = 350 + 2(60) = 470
It can be seen that Qs (470) > Qd (440).