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PROBLEM SET 1 Supply and Demand Department of Economics Temple University Prof. William J. Stull Economics 201 A. Caraway Seeds East Egg and West Egg...

PROBLEM SET 1 Supply and Demand Department of Economics Prof. William J. Stull Temple University Economics 201 A. Caraway Seeds East Egg and West Egg are two independent island economies separated by Baker Channel, a waterway uncrossable by boat or airplane due to treacherous weather conditions. Caraway seeds are produced and sold under conditions of perfect competition on both islands. The supply and demand schedules for the two markets are shown below. The Q’s are measured in pounds and P is price per pound. East Egg West Egg ----------- ------------- Price Q s Q d Q s Q d ----------- ----- ----- ----- ----- 2 30 60 60 150 4 50 50 80 140 6 70 40 100 130 8 90 30 120 120 10 110 20 140 110 1. What is equilibrium price in East Egg? ___ 4, where Q s =Q d _____ 2. What is equilibrium quantity in West Egg? ____ 120 _________ 3. What is the slope of the West Egg demand curve? _ (4-2)/(140-150)=-1/5 ___ 4. Interpret this slope in one sentence. __ When the quantity demanded rise by 1 unit, the price will rise by .2 units. _____________________________________ ____________________________________________________________________ 5. The Myrtle Wilson Memorial Bridge is now built between the two islands making it costless to transport seeds from one to the other (and thus creating a unified market). What will be the new equilibrium price in East Egg? Aggregate the demand curves and the supply curves, then find the price at which the total demand equals the total supply. The equilibrium price will be 6, the same on both islands. 6. What will be the new equilibrium quantity consumed in West Egg? ___ 130 _____ 7. What will be the new equilibrium quantity produced in West Egg? (Think before you write your answer.) ______ 100 ___ B. Gopher Wood
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8. Preliminary research on the market for gopher wood in Ararat indicates that it is perfectly competitive with the following supply and demand relationships: Q = 8 - .6P __ Demand _ Q = 1.4P - 4 __ Supply _ Which equation represents supply? Which represents demand? 9. Solve these equations for equilibrium price and quantity. Qs=Qd; 8-.6P=1.4P-4; now solve for P=6. Plug your answer for P into either curve to find Q=4.4 10. Plot both relationships in Figure A. In your graph show the numerical values for equilibrium price, equilibrium quantity, and the horizontal and vertical intercepts for both curves. Be sure to put price on the vertical axis. Gopher Wood -1 1 3 5 7 9 11 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Quantity Price 11. Further statistical study reveals that the demand equation specified above is incorrect because it ignores the price of Lebanese cedar (P*), a close substitute for gopher wood. The correct relationship is Q = 4 - (2/3)P + 2P*. Solve for the price and quantity reduced form equations. 4-.6P+2P*=1.4P-4 P=4+P* Plug this P into either curve. Q=4-.6(4+P*)+2P* or Q=1.6+1.4P* 12. How much will equilibrium quantity change in response to a one unit increase in
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22. An excise tax of $t per unit is imposed by the government on each spoon sold. This
will cause the price paid by demanders (Pd) to exceed the price received by suppliers
(Ps) by the amount of...

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