Suppose the estimated market demand for a computer is P=1000-0.04Q and the marke

Question

Suppose the estimated market demand for a computer is P=1000-0.04Q and the market supply is P=0.06Q.

(a) What would the market price and output of computer that clears the market (i.e. no excess supply or shortage of goods)? Please show work. Show this on a well labeled graph.

(b) Calculate the price elasticity of demand at the equilibrium price. What does your answer tell us about the market?

(c) Suppose an increase in consumer income by 10% shifted the demand to P=1200-0.04Q holding the supply constant. Suppose also that the price in the market is still at the price that you calculated in part (a). Calculate the income elasticity. What does your answer tell us about the market?

(d) Let’s suppose that this market is a monopoly market. Calculate the profit maximizing level of Q and P. Show this on a well-labeled graph.

Explanation / Answer

a)At equilibrium,

Md=Ms

Or,1000-.04Q=.06Q

Or,.1Q=1000.

Or,Q=1000/.1=10000.

putting value of Q we have,P=1000-.04Q=1000-40=960.

I am sorry as my system is not supporting any diagram.

b)Formula of price elasticity of demand=k*P/Q=.06*960/10000=.00576=.006

So the price elasticity of demand is=-.006.

(c)At new equilibrium,

Md=Ms

Or,1200-.04Q=.06Q

Or,.1Q=1200

Or,Q=12000.

Income elasticity of demand measures the percentage change in quantity demand due to % change in income.

So we can see that quantity of demand is changed by=(12000-10000)=2000.

% change in quantity demand=(2000/10000)*100=20.

So we can get income elasticity =20/10=2

Income elasticity of demand=-2.

d) The monopoly profit maximising condition is,

MR=MC

P=1000-0.04Q.

Or,TR=P*Q=1000Q-.04Q2.

MR=dTR/dQ=1000-.08Q.

but here total cost /marginal cost is not mentioned.I need to know MC to find monopoly price and quantity.

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