The demand curve for product X is given by QDx = 220 ? PX + 3PY + 0.001I where PY is the price of a related good Y, and I is income. The supply curve for good X is given by QSX =10+3PX.
a) What is the marginal effect of an increase in PY on the equilibrium price of good X?
b) How much do we need to increase income, if we want people to trade 5 more units of product X?
c) Assuming PY = 2 and I = 50, 000, what is the equilibrium price and quantity for good X?
d) What is the cross price elasticity of demand of good X with respect to good Y at the equilibrium point calculated above? Are these goods substitutes or complements?
e) What is the income elasticity of demand at the equilibrium point calculated above? What can you say about this good? Is it a normal or inferior good?
f) Assuming the same values for PY and I, find the value of PX that would result in a surplus of 100 units. Also find the value of PX that would result in a shortage of 100 units.