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CHP 4 Practice

The document contains two practice problems about inverse demand and supply curves. The first problem defines the inverse demand and supply curves for product X. It asks to determine the equilibrium price and sales of X and whether X and Y are substitutes or complements based on how a change in Y's price affects demand for X. The second problem provides information about the supply, demand, and elasticities for truck hoods produced by a company. It asks to compute the supply and demand curves for truck hoods.

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100 views6 pages

CHP 4 Practice

The document contains two practice problems about inverse demand and supply curves. The first problem defines the inverse demand and supply curves for product X. It asks to determine the equilibrium price and sales of X and whether X and Y are substitutes or complements based on how a change in Y's price affects demand for X. The second problem provides information about the supply, demand, and elasticities for truck hoods produced by a company. It asks to compute the supply and demand curves for truck hoods.

Uploaded by

Peter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Practice Problems

100 A Midterm #1
Practice

The inverse demand curve for product X is given by:


 Px = 25 - 0.005Q + 0.15Py,
 where PX represents price in dollars per unit, Q represents rate
of sales in pounds per week, and Py represents selling price of
another product Y in dollars per unit. The inverse supply curve
of product X is given by:
 Px = 5 + 0.004Q.
 Determine the equilibrium price and sales of X. Let Py = $10.
 Determine whether X and Y are substitutes or complements.
Solution:

 Equate supply to demand to calculate Q.


 25 - 0.005Q + 0.15(10) = 5 + 0.004Q
 21.5 = 0.009Q
 Q = 2,388.9 units per week
 At Q = 2,388.9, P = 25 - .005(2,388.9) +
0.15(10)
 = $14.56 per unit.
Solution

 Since we can solve for quantity demanded


as a function of prices, we see that there is a
direct, positive relationship between Q and
Py. (Q = 25+.15Py-Px)/.005
 Increases in the price of good Y raise the
quantity demanded for good X at any value
of Px. This implies that goods Y and X are
substitutes.
Practice

 Mid-continent Plastics makes 80 fiberglass


truck hoods per day for large truck
manufacturers. Each hood sells for $500.00.
Mid-continent sells all of its product to the
large truck manufacturers. If the own price
elasticity of demand for hoods is -0.4 and the
price elasticity of supply is 1.5:
 Compute the supply and demand for truck
hoods.
Solution

 Given: P* = $500 Q* = 80 hoods per day


 Ed = -0.40 Es = 1.5
 Demand: Qd = a + bP Supply: Qs = c + dP
 Use E = P/Q(ΔQ/ΔP) to compute b and d.
 b = -0.064 d = 0.24
 Solve for a and c
 Qd = a + bP Qs = c + dP
 80 = a + -0.064(500) 80 = c + 0.24(500)
 a = 112 c = -40
 Qd = 112 - 0.064P Qs = -40 + 0.24P

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