ECON 202 Microeconomics Winter 2008 Economics Department Faculty of Management Technology

Dr. Abdel-Hameed Nawar German University in Cairo

Sheet 5
3. Supply and Demand The U.S. Department of Agriculture is interested in analyzing the domestic market for corn. The USDA's staff economists estimate the following equations for the demand and supply curves: Qd = 1600 - 125P Qs = 440 + 165P Quantities are measured in millions of bushels; prices are measured in dollars per bushel. i. ii. iii. Calculate the equilibrium price and quantity that will prevail under a completely free market. Calculate the price elasticities of supply and demand at the equilibrium values. The government currently has a $4.50 bushel support price in place. What impact will this support price have on the market?

Solution: i. Set Qd = Qs to determine price. 1600 - 125P = 440 + 165P 1160 = 290P P=4 To Obtain Q , substitute into either expression, Qd or Qs : Qd = 1600 - 125(4) Qd = 1600 - 500 Q = 1100 The equilibrium price and quantity are [P* = $4 , Q* = 1100]. ii. For the own price elasticity of demand

૞ ۱ ૙.Qd = 1182.5) Qd = 1037.5 4 4 4 4 4 1 16 2 8 4 4 8 2 16 1 * Hint note that ‫ ܃‬ൌ ۴ ૙. Thus.50 price Qd = 1600 .5 . Consumer Behavior and Utility Utility function is a formula that assigns a level of utility to individual market baskets. the support price would create an excess supply of 145 million bushels that the government would be forced to buy. If the utility function of a consumer is: U=F0.5) Qs = 1182.1037.60 (approximately) ସ iii.5 Complete the following table to find the indifference curve for a utility of 4 and draw the indifference Curve.5 Qs = 440 + 165(4.5 C0.45 (approximately) For the Own Price Elasticity of Supply ௌ ‫ܧ‬௉ ൌ 165 ൈ ଵଵ଴ ൌ 0.5 Surplus = Qs .125(4. 4.5 = 145 millions of bushels.5 C0. Calculate Qd and Qs at the $4.૞ ൌ √۴ ۱ . Solution: Market Baskets A B C D E F C U = F0.஽ ‫ܧ‬௉ ൌ െ125 ൈ ସ ଵଵ଴ ൌ െ0.

2 16.5 C0.Indifference Curve for U=F0. 1 2. 8 Food . 4 4 2 0 0 5 10 15 20 8. 16 Clothing 10 8 6 4.5= 4 18 16 14 12 1.

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