Solutions for problem set 1

Q1.

T 30 50 65 70 80
Q* 0.11 0.43 4 9 1.5
(millions of
kilograms
per year)
P* ($ per 9.89 9.57 6 1 8.5
kilogram)

Q2.

a) Formulate each plan as a function of V, the number

of videos to rent.
TCA = 3V
TCB = 50 + 2V
TCC = 150 + V

Then we have,
TCA (75) = 225
TCB (75) = 200
TCC (75) = 225

Plan B provides the lowest possible cost of $200 if you purchase 75 videos.

b) TCA(125) = 375
TCB(125) = 300
TCC(125) = 275

Plan C provides the lowest possible cost of $275 if you purchase 125 videos.

Q3.

a) When income is 100, 8Qd = 200 – P. Equating Qs = Qd, we get, 8𝑃 # + 𝑃 − 200 = 0. Solving, we find
equilibrium price P* = 4.94 and equilibrium quantity Q* = 24.40.
b) Solving as above, we arrive at P* = 4.41. But at P < 4.5, Q = 0. This means that there is no market
transaction in market for wool if income level is 60.
c) Note that there will be set of parallel demand curves for different levels of income. For some income
levels market will exist and for some others, it will not.
The minimum price at which market exists is P = 4.5. Equating supply and demand at that price, we obtain
the minimum income required for the market for wool to exist. The income level is 66.5. (Solve the
equation: 8*(4.5)2 = 100 – 4.5 + I )