PAM200_Section1_Solutions - PAM200 Section 1 Problem 1.5 We...

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Problem 1.5 We have 20 = I so P P Q d - = + - = 30 20 10 and s Q P = (which remains unchanged for all level of I, why?). We can graph these 2 equations with Price on the vertical axis and Quantity on the horizontal axis: The equilibrium will occur when d Q = s Q , we need to solve this. We will find that 15 = P and 15 = Q at the equilibrium. We have s d Q Q for a price of 18 which implies an excess supply of wool. Sellers will not sell all of their wool, so they will reduce price and the same time lower their quantity supplied. At the lower price, consumers will purchase more. This process will lead to the equilibrium price and quantity. We have d Q > s Q , for a price of 14 which implies an excess demand of wool. Buyers want to buy more wool at this price level, so they will bid up and at the same time lower their quantity demanded. At the higher price, sellers will supply more output. This process will lead to the equilibrium price and quantity. Problem 1.9
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This homework help was uploaded on 02/19/2009 for the course PAM 2000 taught by Professor Evans,t. during the Fall '07 term at Cornell University (Engineering School).

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PAM200_Section1_Solutions - PAM200 Section 1 Problem 1.5 We...

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