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Pam 200 Handout1

# Pam 200 Handout1 - eating French pastries The total...

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1 PAM 2000 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. 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. (b) Now, suppose that income rises from I=\$10 to \$20. Draw a new demand curve on the same graph, and find the new equilibrium. How does price change? How does quality change? (c) We go back to (a). Suppose the supply in the long run is an upward sloping linear curve. What would be the equilibrium price and quantity if income increases from \$10 to \$20? TA: Eunkyeong Lee [email protected] Section Handout #1

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2 3. A consumer wishes to maximize her satisfaction from
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Unformatted text preview: eating French pastries. The total satisfaction she receives from eating pastries is listed below along with the marginal satisfaction she receives from each additional pastry consumed: Num of pastry consumed Total Satisfaction (Cumulative) Marginal Satisfaction 1 5 2 7 3 9 4 10 5 9 6 5 7 -3 (a) How many pastries should the consumer eat if they are free? (b) If the price of French pastries is 3 (in unites measured the same way as satisfaction). How many pastries should the consumer eat now? 4. Let the demand curve be Q=a-bP, where a and b are positive constants. (a) What is the price elasticity at Q=0? (b) What is the price elasticity at P=0? (c) What is the price elasticity at P=a/2b? (d) What is the slope of demand at each of these points? (e) What can you say about elasticity along this curve? What can you say about the slope of this curve? 5. Distinguish between positive and normative economics, giving an example of each type of analysis....
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