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Chapter 2 Key Fall 07

# Chapter 2 Key Fall 07 - Econ 371 Chapter 2 Homework Please...

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Econ 371 Chapter 2 Homework Due: August 31, 2007 Please answer all Questions in the space provided. The following supply and demand functions summarize the market for domestic automobiles: A 600 i 000 , 000 , 1 Pop 000 , 20 I 200 P 210 P 500 Q i 000 , 000 , 1 E 000 , 125 S 750 , 13 W 000 , 100 P 400 P 000 , 2 Q x d SUV s + - + + + - = - - - - - = For the supply equation, P is the average price of new cars, P SUV is the average price of new sport utility vehicles (in \$), W is the average hourly price of labor (wages in \$ per hour), S is the average cost of steel per ton (\$), E is the average cost of energy (\$per mcf natural gas), i is the average interest rate (cost of capital in percent). For the demand equation, P is the average price of new cars, P x is the average price for new import luxury cars, I is disposable income, Pop is population (millions), i is the average interest rate on loans (percent) and A is industry advertising expenditures (millions). a. List the Exogenous Variables? The exogenous variables are P SUV . W, S, E, I, P x , I, Pop, ,i A, b. List the endogenous Variables? The endogenous variables are P and Q

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c. Write out algebraically the marginal effects of the model. 000 , 2 P Q s = . The remaining marginal supply effects would be: 400 P Q SUV s - = 000 , 100 W Q s - = 750 , 13 S Q s - = 000 , 125 E Q s - = 000 , 000 , 1 i Q s - = The marginal effects for demand are 500 P Q D - = 210 P Q x D = 200 I Q D = 000 , 20 Pop Q D = 000 , 000 , 1 i Q D - = 600 A Q D =
d. Give an interpretation of each marginal effect. Quantity supplied increases by 2,000 for each \$1 increase in price, falls by 400 for each \$1 increase in the price of SUVs, falls by 100,000 for each \$1 increase in the wage rates, falls by 13,750 for each \$1 increase in the price of a ton of steel, falls by 125,000 for each \$1 increase in the cost of energy and by 1,000,000 for each one-percent increase in the cost of capital. The quantity demanded of new domestic autos decreases by 500 for each \$1 increase in price,

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Chapter 2 Key Fall 07 - Econ 371 Chapter 2 Homework Please...

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