Supply and demand is a model for understanding how prices and quantities are determined in a market system. To better understand this, two groups of people will be considered, consumers and sellers/producers. The supply and demand model is dependent on a high degree of competition between consumers and producers. Competition among consumers raises the price, while sellers compete with each other and thereby lowering the price. The equilibrium is a point where the demand and supply curves intersect each other. At this point, equilibrium price is often called the "market-clearing" price because both buyers and sellers are satisfied at this price. The supply and demand model applies most accurately when there is perfect competition. In reality, few markets are perfectly competitive. However, the supply and demand framework still provides a good approximation for what is happening much of the time. Elasticity is a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

1. Computation

If P= 500, PX=600, I=5,500, A=10,000, and M=5000, Then using the regression equation and pugging in the variables, QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) =17,650 (Q= -7909.89+79.0989P) with the same prices. c) With all others factors remaining constants, the demand equation is as follows: Q = -5200 - 42(P) + 20(600) +5.2(5500) +0.2(10,000)…