Assignment 1

Demand, Supply, Equilibrium and Price Formation

(Sessions 2–4)

1. There are 10,000 identical individuals in the market for commodity X, each with a demand
function Q = 12 – 2P, where Q is the quantity of X demanded and P is the price of X, and 1,000
identical producers of commodity X, each with a supply function given by Q = 20P, where Q is
quantity of X supplied and P is the price of X.
a. Find the market demand and market supply function for commodity X.
b. Obtain the equilibrium price and equilibrium commodity of X.
c. Calculate the own-price elasticity function (in terms of price) for both the market
demand curve and the market supply curve. Using these functions, calculate the own-
price elasticity of demand and supply at the point of equilibrium.
d. Calculate the consumer surplus and the producer surplus at equilibrium.
e. What happens if, starting from the position of equilibrium, the government imposes a
price floor of Rs.4/- on commodity X?
f. What happens if, starting from the position of equilibrium, the government imposes a
price ceiling of Rs.2/- on commodity X?
2. Should a producer, facing a negatively sloped demand curve for the commodity sold, operate in
the inelastic range of the demand curve?
3. If the market demand for agricultural commodities is price inelastic, would a bad harvest lead to
an increase or a decrease in the incomes of farmers (as a group)?
4. Find the price elasticity of demand for the demand curve Q = aP .
–b

5. The price elasticity of demand for a demand curve is same for every level of price. Show that the
functional form of the demand curve would be Q = aP where a and b are parameters of the
–b

curve.
6. You are the CEO of a taxi company in city A. A recent strike in your company by taxi drivers has
resulted in a high wage settlement in city A. You now have to pay taxi drivers 10.0 per cent more
wage compared to the wage before the strike took place. Should you increase taxi fares?
7. You are the curator of a museum. The museum is running short of funds, so you decide to
increase revenue. Should you increase or decrease the price of admission?