Question

2. Suppose the market for X is made up of two individuals,AandB. Both have linear demand...

2. Suppose the market for X is made up of two individuals,AandB. Both have linear demand for X that may be described by the following observations:

(I)A does not purchase X whenever the price is greater than or equal to $12. Each dollar decrease in price below $12 causes A to increase consumption of X by 1 unit.

(II) B does not purchase X whenever the price is greater than or equal to $8. Each dollar decrease in price below $8 causes B to increase consumption of X by 1 unit.

(a) Graph the demands for A,B. Label the intercepts.

(b) For what range of prices is only one individual in the market?

(c) What are the P and Q values for which there is a “kink” in the market demand curve?

(d) Graph the market demand. Label the intercepts as well as the P and Q at the kink.

(e) Find both the market demand and inverse demand functions.

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Homework Answers

Answer #1

(a) The demands for A,B is graphed below. For A, horizontal intercept is 12 and vertical intercept is also 12. The same for B is 8 and 8.

(b) For a range of prices 8 < P < 12< there is only one individual in the market and that is A.

(c) The value of P and Q for which there is a “kink” in the market demand curve is P = $8 and Q = 4.

(d) The market demand is shown below

(e) Demand A is QA = 12 - PA or PA = 12 - QA. Demand B is QB = 8 - PB or PB = 8 - QB

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