Question

Price Osup 120 14 140 18 160 22 180 26 200 30 220 34 240 38 Qdem 30 26 22 18 14 10 8 1. Calculate the elasticity of demand at the current equilibrium price and indicate if this is elastic or inelastic. 2. If the government placed a $10 tax on the production of this item, would the producer or the consumer absorb the larger portion of this fee?. 3. On average, young single men earning $40,000 per year spend $2,000 on clothing. Young single men earning $50,000 per year spend $3,000 on clothing. For this demographic group, clothing is: (show your work) a) an inferior good b) a normal good c) a substitute good d) a complementary good e) a luxury item 4. The cross price elasticity for items A and B is 2.3 so A and B are a) elastic goods b) unrelated goods c) substitute goods d) complementary goods e) luxury items

Answer 1

price 120 140 160 Qsup 14 18 22 Q dem 30 26 22 26 18 180 200 30 39 14 8 220 240 1. Linear demand function takes the form of? Qo= mp+b where m is the slope and be b is the vutial intercept of the demand cmue. Now we have to consider two ordered pairs, from the table we can see that at Price $ 140 quarbity demaded is 18 nits lie x = $140 and and at pure $160, quantity demonded is 22 mits e when H2= 9 160 Y2 = 22. Hince we have two ordered pairs (X,Y)= ( 140 ) and (X2, Yz) a (160, 22). Now slope 4 me (72-Y!). (2248) (22- 26) m - - Ito (160-140) - -5--02 Hence demand equation 1. Q = - 0.2 P tb Now to find b, we substitute (X1,Y1) =(140,26) Scanned with in toam the demad function. 20

thie, 26=(-0.2 x 140) + b 26=-28 to - (26+28) = b =) b=54 На 29 он 4, алты с ми - Qo - 0.2 p +54 a) Qd = 54-0.2P Now Price elasticity of demand E= dad. Le -0.2 = dp b Now, here dal 012 substituting lad . Now , -0.2 P= equilibriva price ie $160 and when P = $460 Qd will Qdo 54 - 10.2 x 160) - 22 Hunce, E = -0.2 x (160) = -1.45 or absolute value of elasticity l{}= 1.45 which is great them I hence demand is elastic / 1 22 demand and supply schedule. - 2 Now we can graph the Scanned with CamScanner

equation Also - Also we can denive the linear supply en general this will take the form of? 42 mp+2 the also we take two ordered pairs (X1) YI) = (14018) and (x2, Y2) - ( 160,22) Now, slope of the supply curve :- y2-y1 X2-X1 I (22-18 Ć T 160-140) - 20 - 5 = 0.2 Hunce Y= 0.26 tb to find 'b' we substitute (X, Y,) = ( 140,18] ü the supply equation 18= 6.2 x140) +b => 18 = 28+b -) -10- Huce supply canuc equation is Qs - 0.2p-10 =) (Qs+10) = 0.2 p. a $ 5Qst 50 - p. Now afth $ 10 tan on production, supply cauc equation will be? pz 5Qst sot to as P = SQst 60 Scanned with CamScanner

time afth fan equilibrium occms when demand equals at th tan supply schedule and at the equilibruine Qs = QD=Q Hence, demand equation Qd=54-0.28 -) 54-Qd = 0.2p 3 270 - 50o =P stace at equilibrium 270-5Q = 59.760 2) - 109 = - 210 . = Q = 21 . Now, Pill equilibrium Price will be found by by substituting Q=21 in either demand or in Supply equation. Hence P= 270-5Qd 3) P270-5X21) € 9165 This is the price paid by buyns afth fan. Now aftos tan puce received by sellus will be fond by substituting Q=2 4 in to the initial supply emre er nation. Hace P=5Q+50 ay p= (5x21) 750 =9 155 This is the price received by Sellas alta tore. on tuce pre-stan tonica Consmens equilibrium are paying price was $160. Afth $ 165, hence burden CamScanner

on consuns at tu tan seh a consmens = $ (165-160] = $5. Also, un tau sellus are receiving $15s. Huice neden on producns - $ (160-155) = $s. Hence were consimers and producus bear the equal burden of the tan 3 when, earning mi= $40,000 spending on clothing is QF $ 2000 and when conning M2= $ 50,000 spruding on clothing in Q = 4 3000 Hace any income to income elasticity of demand (Q2-QI). (3000-200) TQ1 +Q2] * exloo ( 3600 72000) 10 72000X100 1.2 Em =- 15000-400) x100 (M 2-M1) x100 sorsot 40000) | M2tmi 2 2 - 40 x 22.22 = 1.8 - Hue as, value of income elas biely of demand Em lie 18 is greath than 1, hence for clothing is a tu lunury good for tin group. hence - answn will be in es a lunary item. Scanned with CamScanner

The y 1. The cross price elasticity for itus A and B in e 2.3. As cross puce elasticity is positive, thers, as price of good B in na ases, demand for good A increass. these good And B me Substitutes of each other. Huce the answn yr e a substitute good Scanned with CamScanner