Question

Suppose that you have estimated the following demand curve:

P = 30 + .00025I – 0.25QD

QD = 120 − 4P + .001I

You know that the current market price is $11 and average income (I) is $40,000.

Calculate the markets total Demand?

b.Calculate the market’s consumer surplus.

Draw the Demand Curve and identify

the price quantity and label the axes for

price and quantity.

Calculate the price elasticity of demand

Is the price elasticity of demand calculated in Question #1c elastic or inelastic?

Calculate the income elasticity of demand

Based on the income elasticity of demand calculated in Question #1e, is this product a normal good or an inferior good?

Answer 1

a)

I = 40000 , P = 11

Market's total demand: Qd = 120 - 4 x 11 + 0.001 x 40000 = 116

b)

Consumer surplus = (40 - 11) x 116/2 = $ 1682

Price elasticity of demand = dQ/dP x P/Q = -4 x 11/116 = - 0.38

The price elasticity of demand is inelastic as abs (PE) < 1

Income elasticity of demand = dQ/dI x I/Q = 0.001 x 40000/116 = 0.345

Since income elasticity of demand is positive, this product is a normal good.