Question

QUESTION TWO

Suppose that you are given the following demand and supply functions, respectively:
Q_d=σ
Q_s=P
Where Q_d is the quantity demanded, Q_d is the quantity supplied, P is the price, and σ is a non, negative integer.

REQURED:

1. Determine the equilibrium price and equilibrium quantity.                                                [2 Marks]
2. Draw a well labelled diagram showing (i) above.                                                    [4 Marks]
3. Find the price elasticity of demand at the equilibrium point.                                 [3 Marks]
4. What is the nature of elasticity?                                                                                  [1 Mark]
5. Find the price elasticity of supply at the equilibrium point.                                                [3 Marks]
6. What is the nature of elasticity?                                                                                  [1 Mark]
7. Suppose now that government subsidises consumers’ purchases by α per unit. Suppose further that this subsidy goes directly to the consumers. Find the new level of equilibrium price and quantity.                                                                                             [4 Marks]
8. Draw a diagram showing (viii) above.                                                                                    [3 Marks]
9. Find the price elasticity of demand at the equilibrium point in (vii).                     [2 Marks]
10. Find the price elasticity of supply at the equilibrium point in (vii).                                    [2 Marks]                                                                                                                   [TOTAL: 25 MARKS]

Answer 1