Question

Consider the following supply and demand functions qD = 12-3p qS = -3 + 2p a)...

Consider the following supply and demand functions

qD = 12-3p

qS = -3 + 2p

a) Plot the supply and demand functions.

b) What are the equilibrium price and quantity?

c) At the equilibrium price and quantity, what is the price elasticity of demand?

d) Interpret the price elasticity of demand. How much will quantity change if the price increases by 1%?

e) Suppose I were to calculate an income elasticity of e = 0.5 What does this imply about the good in our market?

f) Suppose there were another good in our market and I calculated a cross-price elasticity of et = -1.2 What does this imply about the relationship between both goods?

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Answer #1

Ans. b) equilibruim price is $ 3 and quantity is 3 units

d) calculated price elasticity of demand implied that when price changes ( increases/ decreases) by 1% then quantity demand changes ( decrease/ increase) by 3%. the negative sign shows that negative relationship between price and quantity demand. change in quantity demand is -0.09

e) positive income elasticity implies that good is a normal good.

f) both goods are complementary goods.

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