PS8_Solutions

# PS8_Solutions - P 1 = 10 for a quantity of Q 1 = 15 b...

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AEM 4150 PRICE ANALYSIS Fall 2008 Problem Set #8 Suggested Solutions 1. (a) False. Supply side. (b) True. (c) Bad news seems to have a more pronounced impact on stock price volatility than does “good” news. (d) No biological constraints for downward phase. The upward phase is subject to the biological constraints (e) Each year, coke demand in the United States increased by 0.536 gallons, holding other factors constant. 2. Price Large number of college applications has driven up the demand for college education, while the supply of college education has been stable over the last several decades. When we plot the equilibrium price against time, we find an upward trend. 3. The Cobweb model for the juice industry: Q t s = P t-1 Q t d = 23 - 0.8P t P o = 15 a) Calculate equilibrium price and quantity at time 1 (i.e., t = 1). Q 1 s = P 0 = 15 Q 1 d = Q 1 s t P1 Q1 D1 S1 Q D2 t2 Q2 P2 P3 t3 Q3 D3 1

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23 - 0.8P 1 = 15 P 1 = 10 Therefore the market clearing price in period 1 is
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Unformatted text preview: P 1 = 10 for a quantity of Q 1 = 15 b) Calculate equilibrium price and quantity at time 2. Q 2 s = P 1 = 10 Q 2 d = Q 2 s 23 - 0.8P 2 = 10 P 2 = 16.25 Therefor the market clearing price in period 2 is P 2 = 16.25 for a quantity of Q 2 = 10 c) Calculate equilibrium price and quantity at time 3. Q 3 s = P 2 = 16.25 Q 3 d = Q 3 s 23 - 0.8P 3 = 16.25 P 3 = 8.4375 Therefor the market clearing price in period 3 is P 3 = 8.4375 for a quantity of Q 3 = 16.25 d) The graph of the above Cobweb model is shown in next page. Arrows indicate the direction of causality. e) What happens to equilibrium price and quantity over time? Why? Equilibrium price and quantity diverge over time. This is because the slope of the demand curve is steeper than the slope of the supply curve. 2 P S Q 2 = 10 Q 3 = 16.25 Q1 = 15 Q E = 12.78 D Q P 2 = 16.25 P = 15 P E = 12.78 P 1 = 10 P 3 = 8.44 3...
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PS8_Solutions - P 1 = 10 for a quantity of Q 1 = 15 b...

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