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

Question

Answer all questions, a through f. On questions c, d, e and f show your math. If you do not show your math you do not receive points.

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?

Explanation / Answer

If M is income,it is a normal good, because dQd/dM >0. I don't know what the heck PI is?. In equilibrium QD=QS 75+200-4P=-43-32+3P 7P=350 P=350/7=50 Qd=75+200-200=75= -43-32+150 Hope this helps

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