1) Consider the market for a particular type of bolt described by the following
ID: 1252888 • Letter: 1
Question
1) Consider the market for a particular type of bolt described by the following equations:
a) Find the equilibrium price and equilibrium quantity transacted in this market
b) If the market price is $2.10, would this create excess demand or excess supply? How much would this "excess" be if it does exist?
c) Determine the price elasticity of demand at equilibrium and interpret your result.
d) Briefly explain how the elasticity coefficient calculated in part C, would assist a revenue maximizing firm in shaping its price.
Explanation / Answer
A) to find equilibrium you must set the equations equal to each other: 25-p^2 = -3 +3p 28-p^2-3p = 0 solve for p. p = -7 or 4, since P can't be negative 4 is the answer. Price = 4 Quantity = 25 - 4^2 = 9 B) If price is lower than equilibrium price there will be excess demand. To find excess subtract supply from demand 25-2.1^2 - (-3 + 3*2.1) = 17.29 C) Using calculus you can get point elasticity. P/Q * (dQ/dp) dQ/dp = -2p 4/9 * -8 = -3.555 for each 1% increase in price units demanded will fall by 3.55% D) A revenue maximizing firm would aim to produce where the point elasticity is equal to -1. So in this case the firm should lower their prices to maximize revenue.
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