ECO403

Assignment no. 01
Mehreen Nasir
Bc080400483
Question 01:

Following figure shows the equilibrium in bicycle market, ‘S’ shows the supply
Curve of bicycle and ‘D’ shows the demand curve for bicycle.
Refer to this figure, graphically show what will happen to the equilibrium if:

a. Income of the consumers rises.

P2
P1
D

D``

Q1 Q2

Demand curve shift outward

b. Cost of production of bicycles rises.

S1
S

P2

P1

D
 Q2 Q1

Supply curve shifts inward

Question 02:

Consider an economy described by the following equations:

Y=C+I+G
Where, Y = 6,000, G = 2,000, T = 2,000
C = 300 + 0.50 (Y-T)
I = 2,000 – 60r
In this economy, compute:
a. Private saving
b. Public saving
c. National saving
d. The equilibrium interest rate
e. The amount of equilibrium level of investment

At first there is a need to calculate the value of “C”

C=300+0.50(Y-T)

Putting the values:

=300+0.50(6000-2000)
=300+0.50(4000)
=300+2000
C=2300

a. Private saving

Formula:

Private saving = (Y – T) – C

Putting the values:

= (6000-2000)-2300
=4000-2300
 =1700

So the private saving is 1700

b. Public saving

Formula:

Public saving = T – G

Putting the values:

= 2000 – 2000
= 0
So the public Saving is 0

c. National saving

Formula:

National saving = (Y - T) – C + T – G
=Y-C-G

Putting the Values:

=6000-2300-2000
=3700-2000
=1700

SO the National Saving is 1700

d. The equilibrium interest rate

1st we have to calculate the value of “I”

Formula:

Y=C+I+G

Y-C_G=I
I=Y-C-G
Putting the Values:
 =6000-2300-2000
I=1700

Putting the value of I in the below Equation:

I = 2,000 – 60r
Putting the Values:

1700 = 2000 – 60 r
60r = 2000 – 1700
r = 300/ 60
r =5
So the equilibrium interest rate is 5

e. The amount of equilibrium level of investment

I = 2,000 – 60r
= 2000 – 60(5)
= 2000 – 300
I = 1700

So the amount of equilibrium level of investment is 1700