Section 1 - Solutions (2).pdf - EEP 147 Section 1 Solutions GSIs Shelley He Daniel Kannell January 30 February 1 2019 Perfect Competition Equilibrium 1

Section 1 - Solutions (2).pdf - EEP 147 Section 1 Solutions...

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EEP 147: Section # 1 Solutions GSIs: Shelley He & Daniel Kannell January 30 & February 1, 2019 Perfect Competition: Equilibrium 1. Suppose the market for corn is perfectly competitive with the aggregate demand func- tion Q D ( P ) = 16 - 2 P and the aggregate supply function Q S ( P ) = 4 P - 8. (a) Derive functions for inverse demand and inverse supply. Q D ( P ) = 16 - 2 P P ( Q D ) = 8 - Q D 2 Q S ( P ) = 4 P - 8 P ( Q S ) = 2 + Q S 4 (b) Find the competitive equilibrium price ( P * ) and quantity ( Q * ). Q D ( P ) = Q S ( P ) 16 - 2 P = 4 P - 8 P * = 4 Q D ( P * ) = 16 - 2(4) Q * = 8 (c) Sketch a graph of inverse demand, inverse supply, and the competitive equilibrium. Shade in the areas representing consumer surplus ( CS ) and producer surplus ( PS , a.k.a. profits). Calculate CS and PS (recall the area of a triangle: A = 1 2 bh ) . CS = ( 1 2 ) (8 - 4) (8) = ( 1 2 ) (4) (8) = 16 PS = ( 1 2 ) (4 - 2) (8) = ( 1 2 ) (2) (8) = 8 1
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Section #1 Solutions EEP 147, Spring 2019 (d) President Trump decides to thank his voters in the corn belt through his new policy, The Make Corn Great Again Act of 2017. Under this policy, the federal government pays farmers $1 . 50 for each unit of corn they produce. How might you expect President Trump’s policy to change the supply and demand of corn?
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