Pam 200 Handout1 Answers - PAM 200 Fall 2008 TA: Eunkyeong...

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1 PAM 200 Fall 2008 1. Draw a demand and a supply curve for a good, and denote the equilibrium price at P=$5 and quantity Q=10. Now, we conduct an experiment in this market. We artificially and temporarily set the price at $10. Explain what would happen in price and quantity. Answer: Since P=$10 is greater than the equilibrium price (P*=$5), there is excess supply (Q s >Q d ) Since sellers can’t sell all of Q s , they would decrease the price, which would lead to the increase in quality demanded. Eventually, it will converge to the equilibrium price at $5 and the equilibrium quantity Q=10. 2. The demand for apartments is represented by Q d =100-P+0.5I, where P is the price of apartments and I is income. Short-term supply is fixed at Q=50. Let I=$10. (a) Draw the demand and the supply curve. Denote the intersection of these lines, the market equilibrium, at point A. Answer: First, simplify the demand function (remove I, and leave only P and Q): Q d =100-P+0.5I = 100-P+0.5($10)=105-P. Q s =50 in the short run. At the equilibrium E, Q d = Q s 105-P=50. P*=55. Q*=105-55=50. Q P Q*=10 Demand Supply P*=$5 P’=$10 Q s Q d TA: Eunkyeong Lee el223@cornell.edu Section Handout #1 Answer Key
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2 (b) Now, suppose that income rises from I=$10 to $20. Draw a new demand curve on the
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Pam 200 Handout1 Answers - PAM 200 Fall 2008 TA: Eunkyeong...

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