Question

4a. Suppose the general demand function for cars is Qd = f(P, M, Pgas, Pe, N) such that M = average income of $30,000; Pgas = $2.75 per gallon of gas; Pe = $20,000 expected future price; and N = 700 consumers in the market. Suppose the general supply function is Qs = f(P, P1, Pr, T, Pe, F) such that P1 of average wages is $15.15, Pr = $35,000 the average cost of SUV's, T = 100 the average level of technology and F = 21 is the average number of firms in the industry. Explain the meaning of the general demand function, the general supply function, and the next steps in solving this problem.

Answer 1

The general demand function for cars in the above question depicts that demand for cars is related to price of cars, the income of the consumer, Price of the gas which is a complementary good of cars and gas and cars are both complements, the expected future price of cars and number of consumers in the market. The demand for cars is negatively related to price of cars,price of the complementary goods. It is positively related to the income of the consumer, expected future price level and number of consumers in the market.

The general supply function of the good depicts that supply of the good depends on price of the good, price of inputs used in production, the level of technology and average number of firms in the industry. As the price of the good increases, the supply of the good also increases, as the price of inputs increases, the supply of the good decreases, supply declines if average cost of SUVs increases and vice versa. As the level of technology increases, the supply will increases and increase in the number of firms reduces supply by an individual firm.

In another step, we need to compute the demand equation of the good using data and then equate the values in the question mentioned above to get the demand equation in terms of price and quantity of the good. Same applies in case of the supply equation where the given values will be put in the supply equation to get the equation in terms of price and quantity. Equating both demand and supply equations we get the equilibrium value of price and quantity.