202-S08 PS1 SN

# 202-S08 PS1 SN - 6 Confusion between a change in demand and...

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Economics 202 Problem Set 1 Brief Answers Spring 2008 1. b) P = \$8; Q = 11. c) Q d = 23 > Q s = 3 so shortage. d) Q d = 11 = Q s so nonbinding constraint. 2. P BT = \$8, Q BT = 11. A,B,C) First solve to get the new supply curve equation, Q s = -9 + 2P. Then, set this equal to the demand equation to obtain P AT = \$8.80, Q AT = 8.6, P N = \$6.80, Tax Revenue = 17.20; D,E) t c = (P AT – P BT )/T = .4, t p = (P BT – P N )/T = .6. 3. A,B,C) P AT = \$10, Q AT = 11, P N = \$8, Tax Revenue = 22, D,E) t c = 1, t p = 0. 4. A) P M , Q M both increase; P C , Q C both decrease; B) Set supply = demand for both cookies and milk and solve the two equation in two unknowns for (P M , Q M ) = (P C , Q C ) = (10,10). C) Repeat the steps in B) with the new milk demand to get (P C , Q C ) = (5,5), (P M , Q M ) = (25,25) 5. a) Sure, b) Nope. To be purchased in the first place, it had to be normal over some income range. (Thought experiment: Start at an income of zero with no purchases at all and then think of what it would mean if a good were inferior at all income levels.)
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Unformatted text preview: 6. Confusion between a change in demand and a change in quantity demanded beginning in the third sentence that makes the rest of the analysis flawed. Correct: As people want more of a good, the demand increases instantaneously causing a shortage. This causes the price to rise and the quantity demanded falls and the quantity supplied rises until the new equilibrium is reached. 7. A. 1/4, B. 1.5, C. To find this, use two equations. First, set the equation for elasticity equal to one: 4(P/Q) = 1. Now, we also need to be sure that we’re on this demand curve so we also need Q d = 50 – 4P. Solve these equations to get (Q,P) = (25, 6.25). D. P > 6.25, e. P < 6.25. 8. P E = \$3.50, Q E = 18,000 9. P AT = \$4.25, Q AT = 15,000 10. P AS = \$2.75, Q AS = 21,000 11. 6,000 12. Apply procedure given in class....
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