Question 5 (5 marks)

Suppose that a perfectly competitive market is characterized by the following demand and supply schedules:

Q^D= 500 - 5P (demand schedule)

Q^S= 50 + 10P (supply schedule)

Where Q^D represents the quantity demanded, Q^S represents the quantity supplied and P is the price of the service.

i.Solve for the equilibrium price and quantity using the demand and supply schedules above.

ii.Draw a supply and demand diagram that clearly labels the axis, supply and demand schedules and the equilibrium point.

iii.Explain why the equilibrium point is the most efficient point of consumption and production.