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Chapter 4Figure It Out 2.1

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Suppose that the demand and supply curves for a monthly cell phone plan with unlimited texts can be represented by
QD = 50 - 0.5P
QS = -25 + P

The current price of these plans in the market is $40 per month.

Is this market in equilibrium?

A.
B.
Incorrect. The market is in equilibrium if, at the current price, quantity demanded is equal to quantity supplied. At the current price of $40, 30 units are demanded, but only 15 units are supplied, so the market is not in equilibrium. For further review, see section “Market Equilibrium”.
Correct! At the current price of $40, 30 units are demanded but only 15 units are supplied, so the market is not in equilibrium. For further review, see section “Market Equilibrium”.
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      Would you expect the price to rise or fall?

      		A.
      		B.
      Incorrect. At a price of $40, buyers demand 30 units while sellers supply only 15; there is excess demand in the market for cell phone plans. That excess demand will put upward pressure on the price of cell phone plans. For further review see section “Market Equilibrium”.
      Correct! Because quantity demanded is greater than quantity supplied, we have excess demand. Excess demand will put upward pressure on the price of cell phone plans. For further review see section “Market Equilibrium”.
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          If you would expect the price to rise or fall, by how much?

          		A.
          		B.
          		C.
          		D.
          Incorrect. The price will move to the equilibrium price of $50, where quantity demanded (25 units) is equal to quantity supplied (25 units). This represents a $10 increase in the price from its current level. For further review see section “Market Equilibrium.
          Correct! The price will move to the equilibrium price of $50, where quantity demanded (25 units) is equal to quantity supplied (25 units). This represents a $10 increase in the price from its current level. For further review see section “Market Equilibrium.
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