PS3&Answers - METU Department of Economics Econ 101...

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1 METU Department of Economics Econ 101 Introduction to Economics I All sections Fall 2009 PROBLEM SET # 3 (With Answers) (CHAPTER 3 & CHAPTER 4) PART A: PROBLEMS 1. Suppose that the demand and supply schedules for bazlama tost in Basri’s canteen are as follows: Price (TL) Quantity Demanded (unit/week) Quantity Supplied (unit/week) 5 5 1 10 4 2 15 3 3 20 2 4 30 0 6 a. Derive demand and supply functions and graph demand and supply curves. Label each axis carefully. Q D = 6 0.2P; Q S = 0.2P b. Find the equilibrium price and quantity for bazlama tost ? 6 0.2P = 0.2P P* = 15 ; Q* = 3 P 15 3 Q S D
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2 c. What will happen in the bazlama tost market at the price level of 20 TL? d. Assume that the customers of Basri’s canteen have increased their interest in bazlama tost and hence quantity demanded increased by 2 unit/week at each and all levels of price. Derive the new demand function, find the new equilibrium price and quantity and show the new equilibrium on the graph. Price (TL) New Quantity Demanded (unit/week) Quantity Supplied (unit/week) 5 7 1 10 6 2 15 5 3 20 4 4 30 2 6 P 20 15 3 4 Q S D’ D P 20 15 2 3 4 Q S D When P = 20 TL, Q D = 2 and Q S = 4. There is excess supply of 2 units. Excess supply would lead prices to fall until Q D = Q S = 3 New Demand Curve : Q D = 8 0.2P Supply Curve: Q S = 0.2P New Eq: P’ * = 20; Q * = 4
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3 e. Starting with the original demand and supply figures, suppose that the price of Ezine cheese (an input in making of bazlama tost ) falls such that at each price, quantity supplied increases by 4 units. Derive the new supply function, calculate new equilibrium quantity and price and show the new equilibrium on the graph. Price (TL) Quantity Demanded (unit/week) New Quantity Supplied (unit/week) 5 5 5 10 4 6 15 3 7 20 2 8 30 0 10 2. The market demand and supply function for a commodity is given below: Q D = 120 4P Q S = -30 + 6P a. Find the equilibrium price and quantity. 120 4P = -30 + 6P P* = 15 Q* = 60 b. What are the consumer and producer surpluses at the equilibrium price? CS = ((30 15)* 60) /2 = 450 PS = ((15 5)* 60) / 2 = 300 Assume that government sets a ceiling price at 10 YTL., c. Will there be an excess supply or excess demand in the market? At P = 10, Q D = 80 Q S = 30. Since quantity demanded exceeds quantity supplied, there is an excess demand by an amount of 50. d. What will be the quantity exchanged at this new price? In this case, quantity supplied will be exchanged. So, it is 30. e. How can this quantity exchanged be allocated? First come first served or sellers’ preferences or queuing or rationing coupons. Demand Curve : Q D = 6 0.2P New Supply Curve: Q ’’ S = 4 + 0.2P New Eq: P’’* = 5; Q ’’ * = 5
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4 f. If all this quantity falls into the hands of blackmarketers what is the highest price buyers would be willing to pay? 120 4P = 30 → P max = 22.5 g. What would be the level of black market profits above? Profit = (22.5*30) (10*30) = 375 Now, assume that the economy in question (before the price ceiling) opens to international trade and the world price is 8, h. What will be the quantity demanded by domestic consumers and the quantity supplied by domestic producers?
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