Practice 2 problem for equilibrium analysis in econ.docx

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ECO 134 (Sections 7 and 13) Instructor: Kanti Ananta Nuzhat (KNz) Practice Problems on Equilibrium Analysis in Economics 1. (i) Assume a simple two sector economy where Y = C + I ,C = C 0 + bY , I = I 0 . Assume further that C 0 = 85, b = 0.9, I 0 = 55. Find the equilibrium level of income in terms of (a) reduced form (general parameters) and (b) the specific values assigned to these parameters Y ( ¿¿ e ) ¿ . (ii) When investment is a function of income and no longer autonomous, say when I = I 0 + aY ; find (a) the equilibrium income in reduced form (general parameters), (b) show what happens to the multiplier and how it changes from (i). 2. A complete demand function is given by the equation: Q d =− 30 P + 0.05 Y + 2 P r + 4 T ;where Pisthe price of the good,Y isincome, P r isthe priceof the related g T istaste. (i) Canthe function be graphed? (ii) Draw the graph of the above demand function assuming, Y=5000, P r = 25, T = 30. (iii) What happens to the graph if the price of the good changes from 5 to 6? 3. What is the equilibrium income when Y = C + I ,C = 50 + 0.8 Y , I = 50. What is marginal propensity to consume (MPC)? How much is it? Can you also draw the

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