Question

The demand and supply curves for a good are given by QD = 50 – 2P and QS = P – 1.

Calculate the price elasticity of demand at the equilibrium price.
Calculate the price elasticity of supply at the equilibrium price.
What would happen to consumer expenditures on the good if firms must pay higher prices for their inputs in production?

Answer 1

QD=50-P

QS = P-1

for equilbruim, QD=QS

50-2P = P-1

P = 51 /3 = 17

Q = 50-2*17

Q = 16

for price elasticity of demand, we take partial derivate of QD with respect to P

= -2

elasticity = * P */ Q*

elasticity = -2 * 17 / 16

elasticity = -2.125

elasticity of supply

= 1

elasticity = 1 * 17/16

elasticy = 1.0625

the consumer expenditures increase on the good , when firms pay higher prices for thier input in production because the price of the good will increase and consumer have to pay more for the same quantity of good .