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QUIZ 1
Econ 212-Section B
Question 1. [5 marks] Suppose the market demand curve for a product is given by Qd=30015 P+10 J and the market supply curve is given by Qs = -25+10 P + 10 K. Assume initially
that J=40 and K=5. (Note that J and K are some exogenous variables).
a) [2 marks] Calculate the equilibrium price and quantity in this market? Show your work.
Answer:
Equating Qd and Qs gives, 700-15 P = 25 + 10 P, which can be solved for equilibrium price:
P*=27. Substitute P* for P in either the equation for the market demand or the market supply
to obtain equilibrium quantity, Q* = 295.
b) [1 mark] Suppose K suddenly increases to 20. How does it affect the market equilibrium
calculated in part a)? (Calculate new equilibrium).
Answer:
Qs now is given by: Qs = 175 + 10 P. Solving as above, the new equilibrium price is: P*=21.
Substitute P* for P in either the equation for the market demand or the market supply to
obtain equilibrium quantity, Q* = 385.
Note that due to this shift in the supply curve to the right, P* has decreased and Q* has
increased.
c) [2 marks] Graph the demand and supply curves (Label the intercepts and slopes) and the
two equilibrium points obtained above (in parts a) and b)) with Price on the Vertical axis and
Quantity on the horizontal axis.
Answer:
The demand curve is linear with y intercept at (700/15) = 46.7 and x intercept at 700. It’s
slope is equal to –(1/15).
The two supply curves are parallel to each other, one with x intercept at 25 and the other with
x intercept at 175. The slope of the supply curves is (1/10). The two equilibrium points are
the intersection points of the demand and the supply curves. The first one has coordinates
(295,27) and the second one has the coordinates (385,21)
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Question 2 [5 marks]
a) [2.5 marks] Suppose demand is given by Qd  300  5P and supply is given by
Q S  10P . Calculate the elasticity of demand at the equilibrium price and quantity. Show
your work.
Answer:
Equilibrium price = 20
Equilibrium Quantity = 200
Elasticity = -0.5
b) [2.5 marks] Consider the demand curve for some good: Qd = 20 – 5I – P, where I stands
for “income”. Calculate the income elasticity of demand. Is it an inferior, normal or luxury
good?
Answer:
Income elasticity of demand is given by the expression:   5
P
P
 5
Qd
20  5I  P
If we were given the Price and Quantity or Price and income at which to measure the
elasticity, we could have obtained a numerical number from above expression. But note that
for Price and Quantity greater than zero, elasticity is negative as any increase in income
decreases the quantity demanded. A good, by definition, is inferior if increase in income
leads to decrease in its demand. Hence, the demand curve given is for an inferior good.
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