ps03_sol

# ps03_sol - ECON1001 Problem set Solution Ex 3 Q1 Assume...

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ECON1001 Problem set Solution Ex. 3

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Q1 Assume that column A and column B are demand and supply curves. The market would achieve an equilibrium at a price of A) \$20. B) \$30. C) \$40. D) \$50. E) \$60. Ans: c P r i c e / U n i t C o l u m n A U n i t s / y e a r C o l u m n B U n i t s / y e a r \$ 2 0 1 0 0 5 0 \$ 3 0 8 5 6 0 \$ 4 0 7 0 7 0 \$ 5 0 5 5 8 0 \$ 6 0 4 0 9 0
If \$20: Qd>Qs excess demand If \$60 Os>Qd Excess Supply Will ONLY happen when there’s some external forces that prevent market price from moving towards the market equilibrium. P r i c e / U n i t C o l u m n A U n i t s / y e a r C o l u m n B U n i t s / y e a r \$ 2 0 1 0 0 5 0 \$ 3 0 8 5 6 0 \$ 4 0 7 0 7 0 \$ 5 0 5 5 8 0 \$ 6 0 4 0 9 0

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Q2 Gertie saw a pair of jeans that she was willing to buy for \$35. The price tag, though, said they were \$29.99. Therefore, A) Gertie should not buy the jeans because they will be of lower quality than she expected B) Gertie should not buy the jeans because the price is not equal to her reservation price. C) Gertie should only buy the jeans if she can negotiate a better price with the salesperson. D) Gertie should buy the jeans because the price is less than her reservation price. A) Gertie should buy the jeans because the price is more than her reservation price. Ans: d
Buyer’s Reservation Price Definition: “the max price the consumer is willing to pay for an extra unit of product” Not that the vertical interpretation of demand curve is Marginal Benefit of consuming that unit.

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Buyer’s Reservation Price Decision to make: unit of purchase Cost-benefit principle suggests that buyers should buy an additional unit only if the marginal benefit (reservation price) is larger than marginal cost (price paid). Decision Rule: Market Price ≤ Reservation Price BUY Market Price > Reservation Price NOT BUY
Buyer’s Economic Surplus Economic surplus to buyers (MB-MC) is also called “Consumer Surplus” for an additional unit. Market Price < Reservation Price positive consumer surplus for that MARGINAL UNIT Market Price = Reservation Price zero consumer surplus for that MARGINAL UNIT Usually Marginal Benefit curve: downward sloping Thus buying up to marginal unit: P=MB Note that when P=MB, it does not matter whether the buyers purchase the additional unit (because it does not change the total economic surplus to the buyers).

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Q3 One observes that the equilibrium price of apples falls and the equilibrium quantity increases. Which of the following best fits the observed data? A) An increase in demand with supply constant B) A decrease in supply with demand constant C) An increase in demand coupled with an increase in supply D) A decrease in demand with supply constant A) Demand constant and an increase in supply Ans: e
A) An increase in demand with supply constant P Q D1 D2 S P2 P1 Q1 Q2

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B) A decrease in supply with demand constant P Q D1 S1 P1 Q1 S2 Q2 P2
D) A decrease in demand with supply constant P Q D2 D1 S P1 P2 Q2 Q1

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E) Demand constant and an increase in supply P Q D1 S2 P2 Q2 S1 Q1 P1
A) An decrease in demand coupled with an decrease in supply Case I P Q D2 D1 S2 P1 P2 Q2 Q1 S1

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A) An decrease in demand coupled with an decrease in supply Case II P Q D2 D1 S2 P1 P2 Q2 Q1 S1
What if An increase in demand coupled with an increase in supply?

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## This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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ps03_sol - ECON1001 Problem set Solution Ex 3 Q1 Assume...

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