Question #54334

a) Determine the market equilibrium price if the demand and supply function is given as:
D = 12p + 8
S = 14p – 4
Where D= demand
S=supply
p= price
b) Determine the equilibrium quantity if price is the same as above
D = 4p – 4q
S = 8q – 4p
Where D= demand
S=supply
p= price
q= quantity
a) Suppose the monthly income of an individual increases from Rs 20,000 to Rs 25,000 which increases his demand for clothes from 40 units to 60 units. Calculate the income elasticity of demand.
b) Quantity demanded for tea has increased from 300 to 400 units with an increase in the price of the coffee powder from Rs 25 to Rs 35. Calculate the cross elasticity of demand between tea and coffee.

Expert's answer

a) D = 12p + 8

S = 14p – 4

Equilibrium price is in the point, where Qd = Qs, so:

12p + 8 = 14p - 4

p = $6

b) The equilibrium quantity is in the point, where Qd = Qs, so if p = 6, then:

D = 4p – 4q

S = 8q – 4p

24 - 4q = 8q - 24

q = 4 units.

a) If income increases from Rs 20,000 to Rs 25,000 which increases his demand for clothes from 40 units to 60 units, then the income elasticity of demand is:

Ei = (60 - 40)/(25,000 - 20,000)*(25,000 + 20,000)/(60 + 40) = 20/5,000*45,000/100 = 1.8, so the good is normal.

b) If quantity demanded for tea has increased from 300 to 400 units with an increase in the price of the coffee powder from Rs 25 to Rs 35, then the cross elasticity of demand between tea and coffee is:

Ecp = (400 - 300)/(35 - 25)*(35 + 25)/(400 + 300) = 100/10*60/700 = 6/7, so the goods are substitutes.

S = 14p – 4

Equilibrium price is in the point, where Qd = Qs, so:

12p + 8 = 14p - 4

p = $6

b) The equilibrium quantity is in the point, where Qd = Qs, so if p = 6, then:

D = 4p – 4q

S = 8q – 4p

24 - 4q = 8q - 24

q = 4 units.

a) If income increases from Rs 20,000 to Rs 25,000 which increases his demand for clothes from 40 units to 60 units, then the income elasticity of demand is:

Ei = (60 - 40)/(25,000 - 20,000)*(25,000 + 20,000)/(60 + 40) = 20/5,000*45,000/100 = 1.8, so the good is normal.

b) If quantity demanded for tea has increased from 300 to 400 units with an increase in the price of the coffee powder from Rs 25 to Rs 35, then the cross elasticity of demand between tea and coffee is:

Ecp = (400 - 300)/(35 - 25)*(35 + 25)/(400 + 300) = 100/10*60/700 = 6/7, so the goods are substitutes.

## Comments

Assignment Expert05.11.15, 15:41Dear Ron, please use panel for submitting new questions

Ron04.11.15, 04:08Trial Balance are prepared to check the arithmetical accuracy of the posting in ledger. “Do you agree? Explain its necessary features & any 5 important steps to be considered while making Trial Balance

Assignment Expert18.10.15, 16:51Dear Serene, all calculations are correct. Please study the matter precisely:

1. income elasticity https://en.wikipedia.org/wiki/Income_elasticity_of_demand

2. cross elasticity http://www.investopedia.com/terms/c/cross-elasticity-demand.asp

Assignment Expert16.10.15, 17:40Dear anu, please use panel for submitting new questions

anu13.10.15, 08:47There is a fruit seller who has 30 Kgs of apples to be sold and he wants to fix a price so that all the apples are sold. There are three customers in the market and their individual demand functions are given below:

D1=25-.05P

D2=20-.025P

D3=15-.075P

Where D is the demand and P is the price

Determine :

Market demand equation for the fruit seller (2.5 marks)

Price at which he can sell all the apples (2.5 marks)

Individual demands of each of the three customers (5 marks

Serene10.10.15, 21:06The calculation for the income elasticity and cross elasticity is wrong

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