24.07.2022 - 13:29

# The domestic demand for MP3 players is given by QD = 5000 – 100P, where P is price measured in euros and quantity Q is measured in thousands of MP3 players per year. The domestic supply curve for MP3

Question:

The domestic demand for MP3 players is given by {eq}QD = 5000 – 100P, {/eq} where P is price measured in euros and quantity Q is measured in thousands of MP3 players per year. The domestic supply curve for MP3 players is given by {eq}QS = 150P. {/eq} Specify:

a. What is the domestic equilibrium in the MP3 player market?

b. Suppose MP3 players can be imported at a world price of

Euro 10

per MP3 player. If trade were liberalized, what would the new market equilibrium be? How many MP3 players would be produced domestically? How many MP3 players would be imported?

• a. To find the domestic equilibrium, we need to find the price and quantity at which the quantity demanded equals the quantity supplied. Setting QD equal to QS, we get: 5000 - 100P = 150P Simplifying, we get: 250P = 5000 P = 20 To find the quantity, we can plug in the price into either the demand or supply equation. Using the supply equation, we get: QS = 150(20) = 3000 So the domestic equilibrium is a price of 20 euros per MP3 player and a quantity of 3000 thousand MP3 players per year. b. If MP3 players can be imported at a world price of 10 euros per MP3 player, the domestic market would now have access to a cheaper source of MP3 players than the domestic supply. The new supply curve would be given by: QSW = 150P + QM where QM is the quantity of MP3 players imported. At a world price of 10 euros per MP3 player, the domestic market would import as much as possible, which is given by the equation: QM = QSW - QS = 150P + QM - 3000 Simplifying, we get: QM = 1000 - 0.67P Setting QD equal to QSW, we get: 5000 - 100P = 150P + 1000 - 0.67P Simplifying, we get: 250P = 4000 P = 16 Using the demand equation, we can find the new quantity: QD = 5000 - 100(16) = 3400 Thus, the new equilibrium price is 16 euros per MP3 player and the new equilibrium quantity is 3400 thousand MP3 players per year. To find the quantity produced domestically, we can subtract the quantity imported from the new equilibrium quantity: QD - QM = 3400 - (1000 - 0.67(16)) = 2400.2 Rounding to the nearest thousand, we get that 2400 thousand MP3 players would be produced domestically, while 1000 thousand MP3 players would be imported. c. Graph: 