Suppose the market for liquor is given by the following demand and supply equations: Demand: QD = 100 – PL – 2PC, where QD is the quantity demanded of liquor, PL is the price of liquor (in dollars), and PC is the price of cigarettes (in dollars). Currently, PC equals $5. Supply: QS = 40 + PL, where QS is the quantity supplied of liquor.
A. Determine the market equilibrium price and quantity of liquor.
B. Determine the value of the price elasticity of demand for liquor at the market equilibrium from part A. Also, at the market equilibrium, determine the value of the cross elasticity of demand for liquor (with respect to cigarettes).
Based on your results, classify liquor demand as price elastic, inelastic, or unit elastic.
Based on your results, are liquor and cigarettes substitutes or complements in consumption?