Question

1. Elasticities Consider the following supply and demand functions qD12-3p s3+2p a) Plot the supply and demand function:s b) What are the equilibrium price and quantity? c) At the equilibrium price and quantity, what is the price elasticity of demand? d) Interpret the price elasticity of demand. How much will quantity change if the price increases by 1%? e) Suppose I were to calculate an income elasticity of ξ 0.5. What does this imply about the good in our market? f) Suppose there were another good in our market and I calculated a cross-price elasticity of ε,--12. What does this imply about the relationship between both goods?

Answer 1

Answer

Demand curve is negatively sloped and supply curve is positively slope in this question.

We can get this from inverse functions. Inverse demand function

P= 12/3 - 1/3 q, so, slope is -1/3 i.e negative

And inverse function of supply curve is

P = 3/2 + 1/2 q , so, slope is 1/2 i.e. Positive