[10 marks] In the UK’s market for cars, demand D is given by D = 120...

[10 marks] In the UK’s market for cars, demand D is given by D = 120 − 3p where p is the price of cars. The supply of cars is given by S = 3p. Define a competitive equilibrium for this market and find the equilibrium price of cars and the quantity traded. Draw a graph of these supply and demand functions (putting p on the “y-axis”) and illustrate the equilibrium outcome on that graph. b) [8 marks] Suppose the demand for cars also depends on the [exogenous] price of petrol p P . Specifically suppose the demand for cars is now D = 120 − 3p − 6p P the supply of cars remains at S = 3p. Find the equilibrium price of cars and the quantity traded. Use a graph of the supply and demand for cars to explain how an increase in the price of petrol affects the market outcome. c) [7 marks] Given the [exogenous] price of petrol p P , show the car market generates sales revenues R = 3[p P ] 2 − 120p P + 1200. Sketch a graph of sales revenue R as a function of the price of petrol. [You may assume the price of petrol does not exceed 20]

Expert Solution

Rahul Sunny answered 2 years ago

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