Suppose the demand and supply curves of a commodity are given by:
qD = 1,500 + p
qS = 500 + 2p
At which of the following prices will there be excess supply?
Answer & explanation
Correct answer: option 2
The correct answer is option 2: 1500
At equilibrium, market supply = market demand.
Equating them, we get 1500+p = 500+ 2p
i.e. 1500-500 = 2p - p
1000 = p
At prices greater than equilibrium price, there is excess supply. The only option with value greater than 1000 is second option. So it is the answer.
- 1000: At this price, qS = qD, so there is no excess supply.
- 1500: This price is greater than 1000, so there will be excess supply.
- 900: This price is less than 1000, so there will be excess demand.
- 850: This price is less than 1000, so there will be excess demand.