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1) I read the chapter 2

2) Exercises

Exercise 1
Q = 300 - 2*P + 4*I (demand)
Q = 3*P - 50 (supply)
a) I = 25
300 - 2*P+100 = 3*P – 50
5*P = 450
P = 90 Q = 220
90 9 9
E PD = ⋅ ( − 2) = − =
220 11 11
E PD 1 ⇒ inelastic

b) I = 50
300 – 2*P + 200 = 3*P - 50
5*P = 550
P=110 Q = 280

90 27 27
E PS = ⋅3 = =
220 22 22
E PS  1 ⇒ elastic

Exercise 2
a) P = 80
P ∆Q 80 2 2 2
E PD = ⋅ = ⋅ =− =
Q ∆P 20 − 20 5 5
E PD 1 ⇒ inelastic

P = 100
P ∆Q 100 2 5 5
E PD = ⋅ = ⋅ = − =
Q ∆P 18 − 20 9 9
E PD 1 ⇒ inelastic
b) P=80
P ∆Q 80 − 2 4 1
E PS = ⋅ = ⋅ = =
Q ∆P 16 − 20 8 2
E PS 1 ⇒ inelastic
P=100
P ∆Q 100 − 2 5 5
E PS = ⋅ = ⋅ = =
Q ∆P 18 − 20 9 9
E PS 1 ⇒ inelastic
c) Q D = QS ⇒ Q D = QS = 18 ⇒ P = 100 (equilibrium)
d) If price ceiling is P = 80 ⇒ P Pequilibrium ⇒ Here will be a shortage. And it is equal to
∆Q = QD − QS = 20 − 16 = 4

Exercise 3
Supply and demand for wheat in U.S in 1998:
QS = 1800 + 240 P
QD = 3550 − 266 P
Suppose that the new markets add 200 million bushels to U.S wheat demand:
QD′ = QD + 200 = 3750 − 266 P
It means that the demand curve shifts to the right by the amount of 200. Here will be a new equilibrium
price at Q D = QS :
1800 + 240 P = 3750 − 266 P
1950 = 506 P
P = 3.85
Q = 2724.9

Exercise 4
QD = a − bP
a) 10 = a − 15b b = 2
 ⇒ ⇒ QD = 40 − 2 P
4 = a − 18b a = 40
QS = c + dP
c = 0
10 = c + 15b  2
 ⇒ 2 ⇒ QS = P
12 = c + 18b a = 3
 3
b) P = 9
P ∆Q 9 6 9 9
E PD = ⋅ = ⋅ = − =
Q ∆P 22 − 3 11 11
E PD 1 ⇒ inelastic
P = 12
P ∆Q 12 6 3 3
E PD = ⋅ = ⋅ = − =
Q ∆P 16 − 3 2 2
E PD  1 ⇒ elastic
c) P = 9
P ∆Q 9 −2
E PS = ⋅ = ⋅ = −1 = 1
Q ∆P 6 −3
E PS = 1 ⇒ unit − elastic
P = 12
P ∆Q 12 − 2
E PS = ⋅ = ⋅ = −1 = 1
Q ∆P 8 −3
E PS = 1 ⇒ unit − elastic
d) A vegetable fiber is traded in a competitive world market and its world market price is $9 per pound.
So, the U.S price will be $9 and quantity imported will be:
QD − QS = 22 − 6 = 16

Exercise 5
Total demand: Q = 3244 − 283P
Domestic demand: Q D = 1700 − 107 P
Domestic supply: QS = 1944 + 207 P
So, demand for an export will be: Q E = Q − Q D = 1544 − 176 P
As we know, the demand for an export falls for 40%, so the new demand for an export is:
QE′ = 0.6 ⋅ DE = 926.4 − 105.6 P
And new total demand is: Q ′ = Q E′ + Q D = 2626.4 − 212.6 P
a) Price before the fall of export demand:
QS = Q
3244 − 283P = 1944 + 207 P
1300 = 490 P
P = 2.65
Revenue of farmers before the fall of export demand:
Re venue = (1944 + 207 ⋅ 2.65) ⋅ 2.65 = 6605.26

Price after the fall of an export demand:


QS = Q ′
1944 + 207 P = 2626.4 − 212.6 P
4196 P = 6824
P = 1.63
Revenue of farmers after the fall of export demand:
Re venue = (1944 + 207 ⋅ 1.63) ⋅ 1.63 = 3718.70
As we can see, the revenue of U.S farmers fell. So, they have reason to worry.
b) Government artificially creates demand, so the price would rise till $3.50. So the new total demand is:
Q ′′ = QD + QE′ + Q government
P ′ = 3.50
Q ′′ = 2626.4 − 212.6 P ′ + Q government

As we know the price $3.50 will be a new equilibrium price, so:


Q ′′ = QS ⇒ 2626.4 − 212.6 P ′ + Q government = 1944 + 207 P ′
2626.4 − 744.1 + Q government = 1944 + 724.5
Q government = 786.2 ( million bushels )
And government will have to spend : Expenditure = 786.2 ⋅ P ′ = 2751.7 ( million dollars )