There are 100 consumers in the economy. Half of them belong to tribe A and demand oranges according to the individual inverse demand curve P = 10 - 2Q. The other half belong to tribe B and demand oranges according to the individual inverse demand curve P = 16-4Q. Suppose that the market-clearing price for oranges is $4. (a) At the market-clearing price, how many oranges does each member of tribe A buy? What is the price elasticity of demand by a member of tribe A at this point? (b) At the market-clearing price, how many oranges does each member of tribe B buy? What is the price elasticity of demand by a member of tribe B at this point? (c) What is the market demand for oranges in this economy? Is the market demand function linear? If not, where is the kink? (d) Using the market demand function derived in part c., what is the total quantity of oranges demanded in this economy at the market-clearing price? (Hint: check that this is consistent with your answers to parts a. and b.) What is the price elasticity of market demand at this point? Is the absolute value of the price elasticity of market demand larger than the absolute value of the price elasticity of individual demand? (e) If the price increases from $4 to $10, how does the consumer surplus chage? Graph the demand curve with quantity on the horizontal axis and price on the vertical axis, and show the change in consumer surplus.
Added by Edwin J.
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Solving for Q, we get Q = 3. So each member of tribe A buys 3 oranges. Show more…
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