The market supply is given by P = 20 + Q. The market demand for good...

The market supply is given by P = 20 + Q. The market demand for good X is given by P = 100 - 2Q - P_Z. P_Z is the price of a related good Z.

Find the market equilibrium for good X when P_Z equals 38; denote the equilibrium as P1 and Q1. Find the market equilibrium for good X when P_Z equals 44; denote the equilibrium as P2 and Q2.

Using the midpoint method, the price elasticity of supply for good X when its price changes from P1 to P2 is ________.
On the first-half of a letter-sized paper, illustrate the effect of the change in P_Z on the market for good X, using a completely-labelled supply and demand graph, with P1, P2, Q1 and Q2 and their values clearly indicated.
On the second-half of the paper, provide an example of goods X and Z, explain why a change in P_Z affects the market for X, and outline the equilibrium process in the market for good X due to the change in P_Z.

Solutions

Expert Solution

In the above picture (1st one) we noticed that when Pz increases from 38 to 44 then Qx falls from 14 to 12 which results in a fall in demand to the existing supply. To cover this deficit the Px will decrease from 34 to 32 later on.

When Pz increases and Qx decreases or Px decreases and Qx increases, then the Z and X goods are known as Complementary goods. Complementary goods are those goods which are consumed together. In the case of these goods. The fall in the price of one causes an increase in demand (rightward shift of the demand curve) for the others and a rise in the price of one causes a decrease in the demand (leftward shift of the demand curve) for the other.

In the above diagram also an increase in the price of one complementary good Z has caused a decrease (leftward shift) in the demand curve of another complementary good X.

In the above picture, Ink (Good X) and fountain pen (Good Z) are complementary goods. A fall in the price of good Z from 16 to 10 has caused an increase in the demand (rightwards shift) for good X from 10 to 20, which later on results in an increase in the price of good X from 30 to 35 due to excess demand in the economy.

Rahul Sunny answered 1 year ago

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