1. Using the general theory from the book, what are five specific variables that
ID: 1132012 • Letter: 1
Question
1. Using the general theory from the book, what are five specific variables that determine the demand curve for a particular brand of prescription drug? Of those five, how many can a firm control? Explain your answer. 2. Consider a general demand function for a good X that has been estimated to be Qs(d)-500-20*Pg + 2py + .01"M where Px is the price of good X Py is the price of a different good, Y M is the per capita income a) Use the textbook and the equation given to figure out whether goods X and Y are complements, subsitutes, or neither (HINT: it isn't neither). What do you need from the equation to answer this question? b) Use the equation to determine whether X is a normal good or an inferior good Explain your answer. c) Calculate the direct demand function, assuming the price of Y is $10 and M is $50,000 d) Using your answer to part c), calculate the inverse demand curve 3. An industry faces a direct demand function of Quas) : 600-9 t has a direet supply cune of Qas) 100+4 P a) Graph the demand and supply curves on a well-labeled graph, including a scale on each b) Calculate the equilibrium price and qoantity Show them on the grapt e) Suppose that the government imposes a price floor of $60/ When the floor is in place, what is the quantity demanded? What ss the quantity supplied? W hat is the result? d) Now suppose that instead of a price floor, there is a price ceiling of $30. Answer the same questions from part e)Explanation / Answer
The given equation is
Qx = 500 - 20Px + 20Py + 0.01M
dQx/dPy = 20 which is positive means that the cross elasticity will be positive and shows that there is positive relationship between the demand for good x and price of related good y. An increase in price of Y will result in increase in demand for X. This means that the goods X and Y are substitutes.
Also dQx/dM = 0.01 which is positive showing that there is direct relation between income and quantity demanded. With increase in income the demand for good X will go up. Therefore the Good X is a normal good.
The direct demand function will be
Qx = 500 - 20Px + 20*10 + 0.01*50000
Qx = 1200 - 20Px or 20Px = 1200 - Q
or Px = 60 - 0.05Q
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