solutions1[1]

# solutions1[1] - EC201 Fall 2007 Prof Jordi Jaumandreu...

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EC201, Fall 2007, Prof. Jordi Jaumandreu Solutions to Problem set #1 Demand and Supply, Applications 1. Replacing p b , p c and Y by its values demand turns out to be Q = 286 20 p. The increse in p b induces an increment of 20(5 . 2 4) in the intercept and demand is now Q = 310 20 p. To represent the change you should use inverse demands: p = 14 . 3 1 20 Q and p = 15 . 5 1 20 Q. 2. Use demand with only part of the values replaced: Q = 261 20 p + 2 Y (we are interested in keeping the Y as variable). Obtain the inverse functions: p = 261 20 + 2 Y 20 Q 20 and p = 88 40 + Q 40 . Make equal the two right hand sides and solve for quantitity as a function of Y : Q = 608 3 + 4 3 Y 3. Represent both supplies using inverse curves: p = a b + 1 b Q a and p = c e + 1 e Q r . Suppose, for simplicity, that a b = c e and that the value is a positive number that we call p. Q = Q a + Q r = a + c + ( b + e ) p when p > p. 4. Make equal the right hand sides of both curves and solve for the equilib- rium price: a bp = c + ep and p = a c b + e . Substituting this expression for p

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