Question 4 (Chiang 2005,pp. 205-207) * Suppose that the demand for some good depends on its...

 

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Question 4 (Chiang 2005,pp. 205-207) * Suppose that the demand for some good depends on its price and household income and the supply depends only on price. Both functions may be nonlinear. Demand: S = D(P, I) Supply: SS = S(P) The price is the endogenous variable and income is exogenous, i.e. the price adjusts until the market for the good is in equilibrium. a) Market equilibrium requires: F(P, I) = D(P, I) - S(P) = 0 What does the function F show? Under what condition does the implicit function P = f(/) exist? Provide the necessary and sufficient condition. b) Determine the effect of an exogenous increase in income on the price of the good. Assume 11 Business School the good is normal. Illustrate with a graph. Hint: Use the implicit function theorem to determine the comparative-static derivative dp/dl. Question 4 (Chiang 2005,pp. 205-207) * Suppose that the demand for some good depends on its price and household income and the supply depends only on price. Both functions may be nonlinear. Demand: S = D(P, I) Supply: SS = S(P) The price is the endogenous variable and income is exogenous, i.e. the price adjusts until the market for the good is in equilibrium. a) Market equilibrium requires: F(P, I) = D(P, I) - S(P) = 0 What does the function F show? Under what condition does the implicit function P = f(/) exist? Provide the necessary and sufficient condition. b) Determine the effect of an exogenous increase in income on the price of the good. Assume 11 Business School the good is normal. Illustrate with a graph. Hint: Use the implicit function theorem to determine the comparative-static derivative dp/dl.

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Demand S DCP 1 Supply 5 SP a F PI DPIS P 0 This implicit function shows that excess de... View the full answer