Suppose that the demand function for a good has the linear form Q 5 D 1P, I2 5 a 1 bP 1 cI and the supply function is also of the linear form Q 5 S 1P2 5 d 1 gP.

a. Calculate equilibrium price and quantity for this market as a function of the parameters

a, b,

c, d, and g and of I (income), the exogenous shift term for the demand function.

b. Use your results from part

(a) to calculate the comparative statics derivative dP∗/dI.

c. Now calculate the same derivative using the comparative statics analysis of supply and demand presented in this chapter. You should be able to show that you get the same results in each case.

d. Specify some assumed values for the various parameters of this problem and describe why the derivative dP∗/dI takes the form it does here.