Question 2. The Market for Hand Sanitizer (25 marks).

Solve the following problem. Show your work step by step. Keep your explanations short and concise

a)Hand sanitizer is a product that most of us use in much larger quantities today than one year ago. It is also a product that has no close substitutes. Based on these characteristics, what can you tell about the price elasticity of our demand for hand sanitizer? Explain. (2 marks)

The demand and supply for hand sanitizer in a market are:

D: Q^D = 4200 - 300P

S: Q^S = -400 + 500P

b)Draw the demand and supply diagram for this market using the equations provided (4 marks)

Note: For full marks, your diagram must include appropriate labels, as well as values derived from the equations provided.

c)Solve for the equilibrium price and quantity. Show these values and the equilibrium point on your diagram (note: trying different values is not solving) (5 marks)

d)A shortage of ethanol, which is the main ingredients in most hand sanitizers, is expected to reduce the supply of hand sanitizer to

S': Q^S = -1000 + 500P

e)Calculate the new equilibrium price and quantity of hand sanitizer. Show the new supply function, the new equilibrium price and quantity and the new equilibrium point on your previous diagram. (6 marks)

f)Some producers are worried about their revenues. Others believe that the decrease in supply may actually help them. They've heard that in other markets producers were able to earn more revenues when their supply decreased, as the price went up. Calculate and compare the producers' total revenue at the original equilibrium and the new equilibrium. Explain which group is right.(3 marks)

g)Calculate the price elasticity of demand as the price and quantity demanded change from the original equilibrium point to the new equilibrium (use the midpoint formula). Is the demand for hand sanitizer elastic or inelastic? How does the price elasticity of demand relate to your findings in part (f)?(5 marks)