Exam 1 - Mock Solution

Exam 1 - Mock Solution - ECON 425 100 1 SOLUTIONS FOR...

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ECON 425 - 100 S OLUTIONS FOR P RACTICE Q UESTIONS FOR E XAM #1 1) Suppose the market for potatoes can be expressed as follows: Supply: Q S = 20 + 10p Demand: Q D = 400 20p Solve for the equilibrium price and quantity. Answer: Equate the RHS of the supply equation to the RHS of the demand equation: 20 + 10p = 400 20p. Rearrange: 30p = 420 or p = 14. Plug this into either S or D to get Q: Q = 400 20(14) = 120. 2) Suppose there are 1000 identical wheat farmers. For each, Total Cost TC = 10 + q 2 . (a) Derive the short-run market supply curve. If the market demand is Q = 600,000 100p. (b) Derive the short-run equilibrium Q, q, and p. (c) Does the typical firm earn a short-run profit? Answer: For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p. The firm’s supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000.
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