Question:
A market demand function for a product sold in a competitive market is given by the equation $Q_D = 180 – 2P$. If the equilibrium price in the market is Rs. 65, the value of the consumer surplus is
(1) Rs. 625.
(2) Rs. 1 000.
(3) Rs. 1 250.
(4) Rs. 3 250.
(5) Rs. 4 500.
Correct Answer:
(1)
Answer Explanation:
First, find the quantity demanded at equilibrium: $Q_D = 180 – 2(65) = 180 – 130 = 50$. Next, find the maximum price consumers are willing to pay (where $Q_D = 0$): $0 = 180 – 2P rightarrow P = 90$. Consumer Surplus = Area of a triangle = $0.5 times text{Base} times text{Height} = 0.5 times 50 times (90 – 65) = 25 times 25 = 625$.
Topic: Consumer Surplus Year: 2020
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