With the cost of production increasing, the supply will shift leftward from S1 to S2, leading to the equilibrium point E2, new equilibrium price P2 and new equilibrium quantity Q2. It's all as below: Now, the effect of decrease in the price of paint brushes, which is a complementary product for interior paint. It will increase the demand for paint (from D1 to D2) and lead to the equilibrium point E3, new equilibrium price P3 and new equilibrium quantity Q3. It's all as below: ...
Part B: We know that:
P1 = 1.80
P2 = 1.60
Q1 = 10
Q2 = 20
Mid point elasticity of demand:
Ed = (2*(Q2-Q1)/(Q2+Q1)*100) / (2*(P2-P1)/(P2+P1)*100)
After putting the values we get:
Ed = (2*(20-10)/(20+10)*100)/(2*(1.60-1.80)/(1.60+1.80)*100)