Assume that Mattel is the only producer of Barbies in USA and that its supply curve is Qs = P+100. The market demand for Barbie is Qd = 100 - 3P + 0.5I; I is the average income measured in hundred of dollars.
a) Compute the equilibrium price and quantity when I= 200. Compute the consumer expenditure.
b) Find the price elasticity of demand and price elasticity of supply for an increase in price 10 (from the equilibrium).
c) Compute the consumer surplus in the equilibrium (from a).
d) Now imagine there is an innovation in the toy industry and Mattel is able and willing to supply 50 units more than before at every price. Illustrate this using the S&D curves and find the new supply and demand functions.
e) Find the new equilibrium price and quantity.
f) What is the new consumer expenditure on Barbies? How does it relate to elasticity?
g) Compute the consumer surplus in the new equilibrium.