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Suppose the supply and demand curves for a particular product are given by: QS =-20+2 P QD =100-2 P where QS and QD are quantities
Suppose the supply and demand curves for a particular product are given by:QS=-20+2P QD=100-2P
where QSandQDare quantities in units andPis the price per unit.
- (a) Graph the supply and demand curves. Be sure to calculate thePandQintercepts for demand and theP
intercept for supply. Calculate and illustrate the equilibrium price and quantity. [Hint: Show your work.] [5]
- (b) Calculate both the demand and supply elasticity around the equilibrium point. [Hint: you can use either the point method or the average arc (midpoint) method.] [5]
- (c) Suppose some condition changes such the demand curve becomes:Q'D=120 - 2P.Calculate the intercepts for the new demand curve and add it to your diagram. Explain why the equilibrium price from part (a) is no longer the equilibrium price. Calculate the new equilibrium price and quantity. [5]
- (d) Suppose the condition that changed inpart (c) was that average consumer income rose from $95k to $105k. Calculate (using the average arc or mid-point method) the income elasticity of demand for the good. Is the good normal or inferior, and if normal, income elastic or inelastic? [5]
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