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Consider the following supply and demand functions qD = 16 − 4p qS = −2 + 5p
a) Plot the supply and demand functions.
b) What are the equilibrium price and quantity?
c) At the equilibrium price and quantity, what is the price elasticity of demand?
d) Interpret the price elasticity of demand. How much will quantity change if the price increases by 1%?
e) Suppose I were to calculate an income elasticity of ξ = 0.1. What does this imply about the good in our market?
f) Suppose there were another good in our market and I calculated a cross-price elasticity of εt = 1.65. What does this imply about the relationship between both goods?
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