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Economic concepts

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Solution Summary

Discussion of own-price elasticity; nonsatiation axiom; profit maximization and other concepts.

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Question 1
Explain how the equilibrium price and quantity changes from the initial equilibrium when:
a. demand increases
As the quantity of a good sold at each price level increases, the demand curve shifts outward.
This results in a higher price and greater quantity at equilibrium.
b. supply decreases
As the quantity of a good supplied at each price level increases, the supply curve shiftss outward. This causes equilibrium price to fall and quantity to rise.
c. supply and demand increase simultaneously
Since both effects cause quantity to increase, the quantity sold at equilibrium will be greater. however, the have opposite effects on price, so price at equilibrium could be more or less depending on the magnitude of each shift.
d. supply increases and demand decreases
When the supply curve shifts outward but the demand curve shifts inward, the change in quantity sold at equilibrium is indeterminant. The price will fall.

Question 2
Assume that the correct demand estimation of a good is P = 12 - 7Q. What are the total revenue, marginal revenue, and average revenue equations that this demand equation generates?

Total revenue:
P* Q = 12Q - 7Q^2
marginal revenue (first derivative of TR equation:
MR = 12 - 14Q
Average revenue:
Total revenue/Q = (12Q - 7Q^2)/ Q = 12 -7Q

Question 3:
Given the following equation: Q=13 - 4p -- 41I -12S, where Q is quantity, P is price, I is income, and S is the price of a related good, Is it elastic, inelastic or unit elastic? What is the income elasticity assuming I=40 and Q=20? Is the good a normal good? Explain

I'm assuming there should only be one "-" between the 4p and 41I, since "4p -- 41I " doesn't make sense.

We define Elasticity as |change price/ ...

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