Midterm Spring2009 Solutions

# Midterm Spring2009 Solutions - ID NUMBER : NAME : Sabanc...

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ID NUMBER : NAME : Sabancı University ECON 204 / MICROECONOMICS Spring 2009 / Section C MIDTERM EXAM May 9 CLOSED BOOK AND NOTES ANSWER ALL SEVEN QUESTIONS TOTAL TIME: 180 minutes Q (1) Q (2) Q (3) Q (4) Q (5) Q (6) Q (7)

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Question (1) (6 points) Consider the market for a certain agricultural product (say, corn) in a country. The demand for corn in this country is given by QD = 2000 – 40 P, where QD is the quantity demaned for corn over a year and P is the price of corn over the same year. Now find the equilibrium price and quantity of corn for each of the following separate cases of (a), (b), and (c): (a) The supply of corn is completely inelastic at Q = 500. (b) The supply of corn is infinitely elastic at P = 30. (c) The supply of corn is given by QS = – 1150 + 50 P, where QS is the quantity supplied of corn in a given year and P is, again, the price of corn over the same year. (d) The production of corn takes time and therefore, the farmers determine the quantity of corn they will each produce one year in advance and they can base their decisions only on the expected price and not the actual price over a certain year. Furthermore, they form their expectations in such a way that the price that is expected to prevail over the next year is equal to actual price in this year. The supply of corn is given by QS = – 1150 + 50 P*, where P* is the expected price. Determine the equilibrium prices in years 2 and 3 if the price in year 1 was 37. (e) Which one of the above cases of (a), (b), (c), and (d) is more realistic? Can each case be realistic under different circumstances? If so, state those circumstances. Answer (a) Equilibrium: QD = QS 2000 – 40 P = 500 1500 = 40 P P = 1500 / 40 = 37 . 5, Q = 500. (b) P = 30, Q = 2000 – 40 (30) = 2000 – 1200 = 800. (c) Equilibrium: QD = QS 2000 – 40 P = – 1150 + 50 P 2000 + 1150 = 50 P + 40 P P = 3150 / 90 = 35 Q = 2000 – 40 (35) = 2000 – 1400 = 600, or Q = – 1150 + 50 (35) = – 1150 + 1750 = 600. (d) P1 = 37 expected P2 = 37 QS2 = = – 1150 + 50 (37) = 700 Equilibrium in year 2: QD2 = QS2 2000 – 40 P2 = 700 1300 = 40 P2 P2 = 1300 / 40 = 32 . 5 P2 = 32 . 5 expected P3 = 32 . 5 QS3 = = – 1150 + 50 (32 . 5) = 475 Equilibrium in year 3: QD3 = QS3 2000 – 40 P3 = 475 1525 = 40 P3 P3 = 1525 / 40 = 38 . 125 (e) Each of these cases can be realistic depending on the circumstances. (a) will be the most realistic case if we consider a very short time period such as a single year after the harvest in which the quantity produced of corn is fixed and there is no previously stored quantity of corn available to be supplied to the market at relatively high prices. (b) will be the most realistic case if we consider a long time period such as fifteen to twenty years in which the number of corn producers can increase and decrease as much as necessary to bring the market to long run equilibrium and the corn sector is a constant-cost one. (c) will be the most realistic case if we consider a relatively short period of time which is nevertheless more than a few years or seasons in which the number of corn producers is constant but they can produce more or less if the price of corn is more or less and the equilibrium price represents the price over this entire period.

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## This note was uploaded on 03/16/2012 for the course FENS 101 taught by Professor Selçukerdem during the Fall '12 term at Sabancı University.

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Midterm Spring2009 Solutions - ID NUMBER : NAME : Sabanc...

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