Remember King Kanuta and his tropical island? The demand function for coconuts by his subjects on the island is D(p) = 1,200 - 100p and the supply function is S(p) = 100p. The law used to be that any subject who consumed a coconut had to pay another coconut to the king. King Kanuta then ate all the coconuts he got. But now the king, apparently fed up with coconuts, decides to sell the coconuts that he collects in the local market at the going selling price, p_s. In equilibrium, the number of coconuts that will now be produced is

Question

Quizplus · Accepted Answer

In equilibrium, the market clears where demand equals supply:
1200 - 100p = 100p
1200 = 200p
p = 6
Substituting the value of p back into the supply function gives us the quantity of coconuts produced:
S(p) = 100p
S(6) = 100(6)
S(6) = 600
However, the king also collects coconuts from his subjects, so the actual quantity of coconuts available in the market is the sum of the quantity produced and collected:
Quantity available = 600 + collected coconuts
The question does not tell us how many coconuts the king collects, so we cannot determine the exact quantity available in the market. However, we do know that the king has eaten all the coconuts he collected previously, so the maximum number of coconuts he can sell now is the total quantity produced:
Max quantity sold by king = 600
Therefore, the best choice is D) 400, which is the closest to the maximum possible quantity sold by the king.

Remember King Kanuta and His Tropical Island? the Demand Function