Consider the market for pocket calculators that is initially in equilibrium at a price of $20.00 per calculator and 10,000 calculators are exchanged per week. Then the demand for pocket calculators increases because consumer incomes increase from $800 per week to $900 per week, so that at a price of $20.00 per calculator the demand for calculators rises to 12,000 calculators. This results in a new equilibrium in the market for pocket calculators at a price of $24.00 per calculator and 11,000 calculators exchanged per week.
Answer the following questions. Present your working and reasoning where needed. Answers without working or reasoning will result in loss of marks.
Q1. [4 marks] Draw a diagram representing what has happened in the market for pocket calculator.
Q2. [4 marks] Using the mid-point method, calculate the income elasticity of demand between pocket calculators and consumer income. What does this tell you about the relationship between pocket calculators and consumer income?
Q3. [4 marks] Using the mid-point method, calculate the price elasticity of supply for pocket calculators. Interpret the result.
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