Gobbet_6_Aggregated_S_and_D_Problem_Set

Gobbet_6_Aggregated_S_and_D_Problem_Set - Gobbet #6:...

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Gobbet #6: Aggregate Supply and Aggregate Demand for a Private Good: Solution (These problems are adapted from Callan and Thomas: Environmental Economics and Management , 2004) In the previous gobbets, we have considered the entire (or aggregate) market supply and market demand. Now we are going to look at how individual demand schedules of consumers and individual supply schedules of producers combine to form the aggregate market demand and aggregate market supply. First, say that there are 2 consumers and 2 suppliers in the bottled water market. Consider the following supply and demand schedules: Determine the aggregate quantity demanded and the aggregate quantity supplied at each price with only 2 consumers and 2 suppliers and fill in the last column of each table. PRICE (P) Quantity Demanded by Consumer 1 (bottles/month) Quantity Demanded by Consumer 2 (bottles/month) Aggregate Quantity Demanded (bottles/month) $0.50 18 9 27 1.00 16 8 24 1.50 14 7 21 2.00 12 6 18 2.50 10 5 15 3.00 8 4 12 3.50 6 3 9 4.00 4 2 6 4.50 2 1 3 5.00 0 0 0 PRICE (P) Quantity Supplied by Producer 1 (bottles/month) Quantity Supplied by Producer 2 (bottles/month) Aggregate Quantity Supplied (bottles/month) $0.50 4 4 8 1.00 12 12 24 1.50 20 20 40 2.00 28 28 56 2.50 36 36 72 3.00 44 44 88 3.50 52 52 104 4.00 60 60 120 4.50 68 68 136 5.00 76 76 152
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Determine the new demand, inverse demand, supply and inverse supply equations for the 2 consumer and 2 producer market. Graph the inverse demands for consumer 1, consumer 2 and consumers 1 and 2 combined on one chart. Graph the inverse supply for producer 1, producer 2, and producers 1 and 2 combined on another chart. Determine the equilibrium price and quantity for this market of 2 producers and 2 suppliers. Show this graphically. SOLUTION: First note that this market deals with a private good. Later on we will talk about public goods. For a private good, to obtain the aggregate demand, we simply add up the individual demand quantities for each consumer in the market. Similarly, to obtain the aggregate supply for a private good, we add up the individual supply quantities for each producer in the market. The values in the last columns of the tables are simply the sum of the values in the 2 nd and 3 rd columns. Using these values you can find the demand and inverse demand equations for the aggregated 2 consumer market. Just use the point-slope formula illustrated in gobbets 2 and 3. (Try this on your own.) Let’s say you did not have the demand or supply schedules, but only had the individual
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This homework help was uploaded on 02/01/2009 for the course AEM 2500 taught by Professor Poe,g. during the Fall '07 term at Cornell University (Engineering School).

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Gobbet_6_Aggregated_S_and_D_Problem_Set - Gobbet #6:...

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