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Question 1
Suppose the supply function for VCRs (good X) is given by
Qs = 100 + 2Px 5Pz x Where Pz is the price of a substitute good, DVD players for example. How many VCRs are produced if Px = 100 and Pz = 10?
Qs x
Qs x
As negative output is impossible. Suppose Pz = 10. Determine the supply function and inverse supply function. Draw the supply curve?
Qs x
Px =
Price 100
Supply Curve
75
50
Quantity
What if the price of the good is $100, how much is the producer surplus? The producer surplus is the area above the supply curve and below the price line. Therefore, 1 Surplus = (50) (25) = $625 2
Question 2
Suppose the demand for DVD players (good X) is given by 1 1 1 Qd = 1200 Px + Py 8Pz + M x 2 4 10 Are goods Y and Z substitutes or complements of good X? Is good X an inferior or a normal good?
Good Y: Substitute Good Z: Complement Good X: Normal What is the quantity demanded of good X if research shows that Px = 500, Py = 400, Pz = 10, M = 10, 000?
Qd x
= 1200
= 2200 150 80 = 1970 Determine the demand function and the inverse demand function for good X?
Qd x
Price
4440
3440
Demand curve
500
Quantity 2220
If the price level is $3440, what is the consumer surplus? If Px = 3440, then
Qd x
= 2220
1 (3440) 2
= 2220 1720 = 500 The consumer surplus equals the area below the demand curve and above the price line, and is calculated as follows
Question 3
Assume the quantity demanded of T-shirts is determined as follows
Qd 90 P Pe
= Qs = 2P 60 = 50
Qe = 90 50 = 40 Draw the demand and supply curves. Show the equilibrium price and quantity on the graph? The inverse demand function is given by
P =
Price
90 80
40 30
50
90
100
Quantity
If California state passed a law that the price for a T-shirt should be $35 (what is referred to as a price ceiling). Is there a shortage or a surplus and by how much? If the price is $35, the quantities demanded and supplied are given by 5
Qd = 90 35 = 55
Qs = 70 60 = 10
Shortage = 55 10 = 45 If California state passed a law that the price for a T-shirt should be $60 (what is refered to as a price oor). Is there a shortage or a surplus and by how much? If the price is $60, the quantities demanded and supplied are given by
Qd = 90 60 = 30
Qs = 120 60 = 60
Surplus = 60 30 = 30
Question 4
Start from the equilibrium point in the ice cream market. What happens to the equilibrium price and equilibrium quantity if weather turns to be very hot? What happens to the equilibrium price and equilibrium quantity if there is an expansion in the sugar cane elds? What happens to the equilibrium price and equilibrium quantity if both events occurred simultaneously? Draw a graph for every case. If the weather turns to be very hot, the demand curve shifts to the right. The equilibrium price increases, and the equilibrium quantity increases.
Price S0
P1
P0
D1 D0 Q0 Quantity Q1
If there is an expansion in the sugar cane elds, the supply curve shifts to the right. The equilibrium price decreases, and the equilibrium quantity increases.
Price S0 S1
P0 P1
D0 Q0 Q1 Quantity
Price S0 S1
P0
D1 D0 Q0 Q1 Quantity
Price S0
S1 P0 P1
D1 D0 Q0 Q1 Quantity
Price S0 S1
P1 P0
D1 D0 Q0 Q1 Quantity