Question

Page 6 of 8 Q.3 (15 points) Consider the market for good A. The quantity supplied is shown in the following table. Column 3 shows the quantity demanded of good A by a household when household income is $60,000. Column 4 shows the quantity demanded of good A when household income is $70,000 (2) (3) (1) Quantity Quantity demanded Quantity demanded Price Supplied (income = $ 60,000) (income = $70,000) $10.00 100 60 20 $8.00 80 80 30 $6.00 60 90 60 $4.00 40 100 70 $2.00 20 110 80 $0.00 0 90 115 (a) When household income is $60,000, what is the equilibrium quantity? What is the equilibrium price? (b) When household income is $70,000, what is the equilibrium quantity? What is the equilibrium price? (c) Calculate the income elasticity of demand when the price of good A = $4 using the midpoint method. (d) Is good A normal good? Give an example of good A. (e) Price of good B increases, the demand for good A decreases. Is the cross-price elasticity positive or negative? Are good A and good B complements or substitutes?

Answer 1

is achieved in the market equilibrium when (aka marked clearing price) when 5 $60, fou then equilibotum quantity equilibrium price $8 80 & 6) when me $70, cou then equilibrium quantity 4 equilibrium price 60 16 c t. A in Qd Income elasticity of, 6:2 demand 15 (70-100 (704160) i. Ei (at P284) (7600 - 60000 0005 +60 CO 2 0.3529 20 0.15 33 - 2.29 * - 2.29 to which is less than a thus it's an inferior good. Hence, А is not a normal good where as it is an 301 inferior good Note: whether a good is inferior not os depends examining income level Camlin

Page : Date : A cha change e Cross elasticity % in Qd of Good A of Y. in Good B in 5 the given case it will have elasticity that its both goods, negative complement cross