Below are the demand and supply schedules for good X In addi

Below are the demand and supply schedules for good X. In addition to the information provided by the schedule, assume that the income level associated with the schedule is $100 Price per QD per QS per Point week eek unit $80 300 100 120 140 160 180 200 220 260 220 180 140 100 60 20 60 100 140 C 180 220 E 260 300 G 340

Solution

a. At the equilibrium, equilibrium price is $140 and equilibrium quantity is 180 units. This is becuase at a price of $ , quantity demanded is equal to quantity supplied. When income is $100, quantity demanded is 180 units.

When income increases to $150, quantity demanded increases to 260 units.

Income elasticity e= % Change in quantity demanded/% change in income

= (260-180/180)/(150-100/100)

=0.44/0.5

=.88

b. The income elasticity of demanded is positive.That means, the quantity demanded of good X increases with an increase in income. Therefore, good X is a normal good.

c. To assesss the relationship between the two goods X and Y, we have to find the cross elasticity of demand between the two goods.

Cross elasticity c=

% Change in quantity demanded of good X/% change in price of good Y

Its given that when price of good changes from 100 to 70, quantity demanded of X rises by 40 units.0.22

= (40/180)/(70-100/100)

= -0.22/0.3

= -0.73

d. The negative cross elasticity between good X and Y implies that these goods are complements. As when price of good Y decreases, quantity demanded of both good X and Y increases.

e. The change in quantity demanded would be larger for new users and increase in revenue because of addicted users. This is because new users have elastic demand for cigarattes while addicted users have inelastic demand for cigarattes.