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Econ1-Fall2010-PS7

# Econ1-Fall2010-PS7 - Econ 1 PS#7 Efficiency Exchange Fall...

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Econ 1 PS #7: Efficiency & Exchange Fall 2010 1. Suppose that the supply curve for wheat is given by Q S = 10 P – 10 and suppose that the demand curve for wheat is given by Q D = 200 – 20 P . a. Find the equilibrium price and quantity of wheat. b. Sketch a picture of the supply curve and the demand curve. Be sure to label i) both axes, ii) the y-intercept both curves, iii) the slope of both curves, and iv) the equilibrium price and quantity. c. Concerned about rising food prices, suppose that the government introduces a price ceiling of \$5. What will be the new equilibrium quantity of wheat bought and sold on the market? d. Is this new quantity economically efficient? Explain. 2. Roger and Mary both regard Coke and Pepsi as perfect substitutes. Roger is always willing to exchange 1 Coke for 2 Pepsis. (If Cokes are on the horizontal axis, Roger’s MRS is 2.) Mary is always willing to exchange 1 Coke for 3 Pepsis. Suppose that initially Roger and Mary are each consuming more than 2 Cokes and more than 2 Pepsis.

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