HW4_Solutions

HW4_Solutions - Homework # 4 Solutions Question 1: Based on...

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Homework # 4 Solutions Question 1: Based on the numbers above, add the missing values and determine what kind of goods all 6 goods are (including savings). Public Transportation: Inferior Good Black Pepper: Neutral Good Food: Normal Good Clothing: Normal Good Vacation: Normal Good Savings: Normal Good Question 2: Suppose that the supply and the demand for cigarettes can be characterized by: Supply: Q s = 600 + 100 P Demand: Q d = 1200 – 200 P 4 150 20 0.1 0.04 0.44 0.08 0.04 150 7.5 2.75 300 0.3 0.17 330 0.33 0.02 0 30 0.03 -0.4

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slope = 0.01 where Q s is the supply of packs of cigarettes, and Q d is the demand for packs of cigarettes. 1. Draw supply and demand curves. (Note that the price is on the vertical axis, therefore the equations for supply and demand must be put in the form P as a function of Q) Answer : Rearranging the equations for demand and supply, we obtain P = 0.01 Q s – 6 P = 6 – 0.005 Q d . Their graphs are 2. In equilibrium, how many packs of cigarettes are purchased? What is the equilibrium price? What is consumer surplus and producer surplus in equilibrium? Answer : From the equilibrium condition Q s = Q d , it follows 600 + 100 P e = 1200 – 200 P e or P e = 600/300 = 2 = P s = P d . Then, Q e = Q s = 600 + 100 * 2 = Q d = 1200 – 200 * 2 = 800. Consumer surplus is (1/2)*(\$6-\$2)*800 = \$1600.
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This note was uploaded on 04/04/2012 for the course ECON 010 taught by Professor Stein during the Fall '07 term at UPenn.

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HW4_Solutions - Homework # 4 Solutions Question 1: Based on...

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