Explain the economics of the signs of coefficient

Question

Assignment:

Suppose the market for gigantic mylar birthday balloons is described by

Q^D = 40 - 6P + 0.21 (Q = Qty of Balloons in 1000s; I = Ave. Income in $1000s)

Q^S = 2P - 2P_M (P = Price of Balloons in $; P_M = Price of 1 kg of raw mylar)

1) Brielly explain the economics of the signs of each coefficient. For example, does an increase in the price of Mylar increase or decrease the quantity supplied? Why does that make sense economically?

2) Assume that average income is $50,000 and the current price of mylar is $3/kg. Calculate the equilibria price and quantity in this market, and draw a graph of the equilibrium (be sure to label the intercepts and :equilibrium with the correct numbers).

3) Now assume that the price of mylar rises from $3/kg to $5/kg. Calculate the new equilibrium and show in your original graph.

4) At the original equilibrium in question 2 (ie P_M = $3), calculate the price elasticity of demand, and the price elasticity of supply. At this point, is the demand curve price elastic, or price inelastic? Explain what these terms mean. Remember to exploit our simplification of the elasticity formula for linear S/D curves.

5) After the rise in the price of mylar (i.e. use the 2nd equilibrium from 3), suppose the government imposes quota that no more than 2,000 mylar balloons can be sold. Draw a new graph that compares consumer a producer surplus before and after the imposition of the quota, and calculate the dollar amount of the deadweight loss associated with this quota. Apply the same letters' analysis from lecture to the quota.