--%>
Assignment Help - homework help

Market demand function

The market  for good X consists  of 2 consumers. consumer  1',s demand  for good X is:

X1 :  15 - 3Px + 0.5PY + .02I1

I1 and I2 are incomes of consumer 1 and 2, respectively.  Px and Py are the prices of goods X and Y, respectively.

a. What is the equation  for the market  demand  function  for X? Graph the two individual demand curves and the market  demand  curve  for the case which  I1 : $2000, I2: $3000, and Py:$ 10.

b. Suppose Px rises  from $5 to $5.05. What is the market price elasticity of demand?

c. Suppose  income  is redistributed so that each consumer  has $2500. If Px: 5 and Py: 10, how much does the quantity of X demanded  change because  of the redistribution?

E

Expert

Verified

a) Equation for consumer 1: X1= 15-3Px + 0.5 Py +0.2I1

Equation for consumer2:  X2= 15-3Px + 0.5 Py + 0.2 I2

Market demand curve is  calculated by aggregating the individual demand curves.

So, By adding the two demand curves we get:  X*=30-6Px +Py + 0.2I1+ 0.2I2

Put the value of Py and I1 and I2.

X*= 30 -6Px + 10 + 0.2(2000) + 0.2(3000) is the market demand curve for the good X

Individual Demand curves will be:

X1= 15-3Px +5 + 400 or X1= 420-3Px
X2= 15-3Px+ 5 +600 or X2= 620-3Px
X*= 30-6Px + 10+ 1000 or X*= 1040-6Px

b. For market   price  elasticity we use market demand curve:

X*= 1040- 6Px

Elasticity:
dx/dp(p/x)=
dx/dp= -6
-6(5/1010)=-0.029

P= original price-which is 5(that is price before the price change)
X= orginal  quantity: quantity demanded at original price of 5= 1040-6(5)=1010
And dx/dP=slope of market demand curve

c. Now each consumer has 2500. So, Put the values In the market demand curve:

X*= 2040-6Px
If Px=6
Then X* demanded will be 2004
And Earlier it would be: X*= 1040-36= 1004
So the change in quantity demanded will be: 1000

   Related Questions in Microeconomics

  • Q : Characteristics of Entrepreneurship The

    The Characteristics common to most of the successful entrepreneurs do not comprise: (1) Vision and timing. (2) Conviction and action. (iii) Luck and the bureaucratic one-upmanship. (iv) Determination and workaholics. Can someone pl

    		•
  • Q : Price elasticity of demand relatively

    The transfer of wealth from industrialized countries to oil exporting countries (OPEC) which followed skyrocketing oil prices within the 1970 year indicates such that the price elasticity of demand for oil: (w) relatively low. (x) relatively high. (y)

    		•
  • Q : Corporate Finance and Retained Earnings

    I have a problem in economics on Corporate Finance and Retained Earnings. Please help me in the following question. The corporate income reserved by the corporation subsequent to paying corporate income taxes and dividends to the owners of general sto

    		•
  • Q : Least Relative Market Interest Rate

    Market interest rates are least associated to the: (1) willingness of people to defer consumption (to save) when they are rewarded for doing so. (2) relative liquidities of alternative financial assets. (3) marginal productivity of new capital relativ

    		•
  • Q : Consumption expenditure In an economy

    In an economy 75% of increase in income is spent on the consumption. Investment raised by Rs. 1000 Crore. Compute: (A) Total increase in income(B) Total increase in consumption expenditure

    		•
  • Q : Wages for workers and economic rent The

    The monthly check which you pay to your landlord shows: (w) interest for use of the landlord’s capital, and wages for maintenance workers, economic rent depends on the location and amount of land as well as perhaps, several economic profit (when there is any mon

    		•
  • Q : Strategic Barriers to Entry in

    Extravagant and costly marketing through established firms in an oligopoly is probable to: (w) encourage entry by other profit maximizing firms. (x) raise the minimum efficient scale of production for new entrants. (y) act as a regulatory barrier of entry. (z) increas

    		•
  • Q : Problem on surplus inventories When the

    When the market price for soccer balls is above the intersection of supply and demand curves, then: (1) Shortages of soccer balls will be extensive. (2) Pressure will exist to raise the price of soccer balls. (3) Salaries paid people who make soccer balls are probable

    		•
  • Q : Statistical perspective of Inferior

    On an average, American families with more income tend to contain fewer children than families with less income. This fact recommends that, at least from a purely statistical perspective, the American children are: (1) Inferior goods. (2) Substitute goods for the cats

    		•
  • Q : Total revenue raised by output

    A firm’s total revenue can definitely be raised by decreasing its output when: (1) its supply curve is perfectly price inelastic. (2) the demand curve for its output is relatively income inelastic. (3) this is currently losing money each period.

    		•