Let’s analyze a supply and demand model of the market for ga…
Let’s analyze a supply and demand model of the market for gas-powered vehicles. Initial conditions are such that the relationship between price and quantity demanded is given by the equation q0D = 200 – 5p. The relationship between price and quantity supplied is described by the equation q0S = 5p – 20. What is the equilibrium price of a gas-powered vehicle? $[p1] How many vehicles are sold? [q1] (We can think about this as perhaps being in thousands of dollars, but just input your calculated numbers in each of these blanks, don’t multiply your answers by 1000 or anything like that.) The federal government offers a tax credit for electric vehicles, making them cheaper for consumers to purchase. This will either shift the supply or demand of gas-powered vehicles inward. Which curve is this? [c] (Either “supply” or “demand” here, without the quotes.) If demand shifts inward, then the new demand equation is q1D = 160 – 5p, and if supply shifts inward, then the new supply equation is q1S = 5p – 60. Solve for the new equilibrium price of gas-powered vehicles: $[p2]. How many vehicles are sold now? [q2] One curve does not shift here. Calculate price elasticity along this curve between the two equilibrium points obtained. That is, if q1* is the first equilibrium quantity sold and q2* is the second equilibrium quantity sold, then % change in quantity is q2* – q1* divided by (q1* + q2*) / 2 times 100. Similarly, if p1* is the first equilibrium price and p2* is the second equilibrium price, then % change in price is p2* – p1* divided by (p1* + p2*) / 2 times 100. Divide % change in quantity by % change in price and report the elasticity here: [e]. Leave any negatives off (take the absolute value), and round your answer to two decimal places. Are we looking at an elastic, inelastic, or unitary interval along our curve? [elastic]
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