Explain necessary conditions for positive equilibrium prices

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Reference no: EM13176534

Given the following supply and demand model:

Qd = a - bP + eYo Demand

Qs = -c + dP + fPr Supply

Qd = Qs Equilibrium

where: a, b, c, d, e > 0 ,Yo is exogenous income, Pr is the exogenous price of a related good.

(a) What are the necessary conditions for positive equilibrium prices and quantities?

(b) What is the economic interpretation of the parameter "f"?

(c) What will be effect (increase or decrease) of an increase in exogenous income on P*, the equilibrium price?

Reference no: EM13176534

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