Question

1. Suppose there is a decrease in the price of gasoline. With the aid of a demandand-supply diagram, explain how this will affect the equilibrium price and quantity in the market of gasoline cars.

2. Suppose the market for Japanese grapes is represented by: Supply: Q = 400 + P2 Demand: Q = 1000 – 5P2

i) Find the market equilibrium price and quantity.

ii) Calculate the price elasticity of demand when the market is at the equilibrium. Show your steps.

 

Answer 1

Answer to Question No. 1

If the price of gasoline decreases the demand for gasoline car will increase. Th gasoline is considered as a complement for the gasoline cars. If the price of gasoline decreases, the cost of running gasoline car also goes down. This will lead to increase in demand for gasoline cars. The demand curve for gasoline cars will shift to the right. The equilibrium price will increase from P to P* and quantity will increase from Q to Q*. The new equilibrium is at the intersection of SS and DD* curves against the initial equilibrium at 'e' corresponding to intersection of DD and SS curves.

Answer to Question No. 2

he market equilibrium is reached at a point where supply equals the demand, so we equate the two given functions

Demand function Q = 1000-5P^2, dQ/dP = -10P

400+P^2 = 1000-5P^2

6P^2 = 1000-400 = 600

P^2 = 600/6 = 100

P = 10

at P=$10, Q = 400+(10)^(2) = 500

Price elasticity of demand =dQ/dP*P/Q = -10*P*P/Q = -10*10*10/500 = -2 The demand is elastic.