Demand and Supply Consider a linear inverse demand function
1 Demand and Supply Consider a linear inverse demand function, P=8—0.5 qd—y, where p denotes price; qd is quantity demanded; y represents income.
a] Does this inverse demand function have a real meaning? If yes, explain; If no, why?
b] Solve the corresponding demand function. Explain the meaning of it. what kind of goods could have this
demand function?
e] Tall: about the assumptions of the demand function. Why is the demand function not realistic? Why do we
still use it for economic analysis?
d] When p = 1 and y = 1, compute the price elasticity and income elasticity. Explain the meaning of the two
elasticities.
e] Discuss what factors could affect the slope of the demand function? Now consider a supply function, And income increases to y = 2.5..
f] Plot the demand and supply functions.
g] What are the equilibrium price and quantity? Discuss the meaning of the equilibria.
