Question

Consider the following market:

Retail Demand: Q = 20-PR

Farm Supply: Q = 1 + .5PF

Marketing Cost Per Unit: MC = $4

Fill in the table below to obtain the points on the derived demand curve.

Quantity	Retail Price	Marketing Cost	Farm-level Demand Price
2
4
6
8
10

2. Draw a graph of the market showing all relevant curves and functions on graph paper.

3. What is the equilibrium quantity? What is the farm price at this quantity? What is the retail price at this quantity?

4. What is the retail elasticity of demand at the market equilibrium?

5. What is the farm-level elasticity of demand at the market equilibrium?

Answer 1

Quantity	retail price	marketing cost	farm level demand price
2	18	8	2
4	16	16	6
6	14	24	10
8	12	32	14
10	10	40	18

3.At equilibrium retail demand=farm supply

20-PR=1+.5PF

1.5P=19

P=12.67(both retail and farm price are same at equilibrium)

Q=7.33(20-12.67)

4.Ed=(change in quantity/change in price)*initial demand price/initial quantity demanded

Change in price=12.67-12=.67

Change in quantity=7.33-8=-.67

Initial price=12

Initial quantity=8

Ed=(.67/-.67)*12/8

Ed=-1.5-elastic demand

5.Es=(Change in quantity/change in supply price)*(initial supply price/initial supply

Change in price=12.67-10=2.67

Chage in quantity=7.33-6=1.33

Initial price=10

Initial quantity=6

Es=(1.33/2.67)*(10/6)

Es=.83-inelastic

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