Suppose that the demand and supply functions for good X are as follows:
QD = 75 + (.004)*M - 4*P
QS = -43 - (.4)*(PI) + 3*P
a. Is this good a normal good or an inferior good? How do we know?
b. Is the sign correct on the coefficient in front of PI? Explain why or why not?
Assume that M = 50,000 and PI = 80.
c. What is the equilibrium price and equilibrium quantity?
d. If a price of $40 occurs in the market, rather than the equilibrium price, would we have a surplus or a shortage? Of how many units?
e. If a price of $60 occurs in the market, rather than the equilibrium price, would we have a surplus or a shortage? Of how many units?
f. If the value of M increased from 50,000 to 60,000 and nothing else changed, would the equilibrium price increase or decrease? By how much? Would the equilibrium quantity increase or decrease? By how much?