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Managerial Economics: Demand, Supply, and Equilibrium

Answer all questions, a through f. On questions c, d, e and f show your math.

Suppose that the demand and supply functions for good X are as follows:

QD = 75 + (.004)*M - 4*P
QS = -43 - (.4)*(PI) + 3*P

a. Is this good a normal good or an inferior good? How do we know?
b. Is the sign correct on the coefficient in front of PI? Explain why or why not?

Now...
Assume that M = 50,000 and PI = 80.
c. What is the equilibrium price and equilibrium quantity?
d. If a price of $40 occurs in the market, rather than the equilibrium price, would we have a surplus or a shortage? Of how many units?
e. If a price of $60 occurs in the market, rather than the equilibrium price, would we have a surplus or a shortage? Of how many units?
f. If the value of M increased from 50,000 to 60,000 and nothing else changed, would the equilibrium price increase or decrease? By how much? Would the equilibrium quantity increase or decrease? By how much?

Solution Preview

a. Is this good a normal good or an inferior good? How do we know?
Coefficient of M is positive. It implies that income elasticity of demand will be greater than zero, which shows that good X is a normal good.

b. Is the sign correct on the coefficient in front of PI? Explain why or why not?
I assume PI represents price of input. If cost of input increases, supply is expected to decrease and if input cost decreases, supply is expected to increase. So, negative sign of PI is ...

Solution Summary

The solution discusses demand, supply and equilibrium in managerial economics.

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