Problem Set 2 Intermediate Business Microeconomics

Sherif Khalifa, Ph.D. Fall 2007

Question 1
Suppose the supply function for VCRs (good X) is given by

Qs = 100 + 2Px 5Pz x Where Pz is the price of a substitute good, DVD players for example. How many VCRs are produced if Px = 100 and Pz = 10?

Qs x

= 100 + 2 (100) 5 (10) = 100 + 200 50 = 50

How many VCRs are produced if Px = 100 and Pz = 30?

Qs x

= 100 + 2 (100) 5 (30) = 100 + 200 150 = 50 = 0

As negative output is impossible. Suppose Pz = 10. Determine the supply function and inverse supply function. Draw the supply curve?

Qs x

= 100 + 2Px 50 = 150 + 2Px

The inverse supply function is given by 1 s Q + 75 2 x

Px =

Price 100

Supply Curve

75

50

Quantity

What if the price of the good is $100, how much is the producer surplus? The producer surplus is the area above the supply curve and below the price line. Therefore, 1 Surplus = (50) (25) = $625 2

Question 2
Suppose the demand for DVD players (good X) is given by 1 1 1 Qd = 1200 Px + Py 8Pz + M x 2 4 10 Are goods Y and Z substitutes or complements of good X? Is good X an inferior or a normal good?

Good Y: Substitute Good Z: Complement Good X: Normal What is the quantity demanded of good X if research shows that Px = 500, Py = 400, Pz = 10, M = 10, 000?

Qd x

= 1200

1 1 1 (500) + (400) 8 (10) + (10000) 2 4 10

= 2200 150 80 = 1970 Determine the demand function and the inverse demand function for good X?

Qd x

1 1 1 = 1200 Px + (400) 8 (10) + (10000) 2 4 10 1 = 1200 Px + 100 80 + 1000 2 1 = 2220 Px 2

The inverse demand function is given by

Px = 4440 2Qd x Draw the demand curve?

Price

4440

3440

Demand curve

500

Quantity 2220

If the price level is $3440, what is the consumer surplus? If Px = 3440, then

Qd x

= 2220

1 (3440) 2

= 2220 1720 = 500 The consumer surplus equals the area below the demand curve and above the price line, and is calculated as follows

Surplus = 250 (1000) = 250, 000

Question 3
Assume the quantity demanded of T-shirts is determined as follows

Qd = 90 P and the quantity supplied is determined as follows

Qs = 2P 60 Determine the equilibrium price and quantity?

Qd 90 P Pe

= Qs = 2P 60 = 50

Qe = 90 50 = 40 Draw the demand and supply curves. Show the equilibrium price and quantity on the graph? The inverse demand function is given by

P = 90 Qd The inverse supply function is given by Qs + 30 2

P =

Price

90 80

40 30

50

90

100

Quantity

If California state passed a law that the price for a T-shirt should be $35 (what is referred to as a price ceiling). Is there a shortage or a surplus and by how much? If the price is $35, the quantities demanded and supplied are given by 5

Qd = 90 35 = 55

Qs = 70 60 = 10

Shortage = 55 10 = 45 If California state passed a law that the price for a T-shirt should be $60 (what is refered to as a price oor). Is there a shortage or a surplus and by how much? If the price is $60, the quantities demanded and supplied are given by

Qd = 90 60 = 30

Qs = 120 60 = 60

Surplus = 60 30 = 30

Question 4
Start from the equilibrium point in the ice cream market. What happens to the equilibrium price and equilibrium quantity if weather turns to be very hot? What happens to the equilibrium price and equilibrium quantity if there is an expansion in the sugar cane elds? What happens to the equilibrium price and equilibrium quantity if both events occurred simultaneously? Draw a graph for every case. If the weather turns to be very hot, the demand curve shifts to the right. The equilibrium price increases, and the equilibrium quantity increases.

Price S0

P1

P0

D1 D0 Q0 Quantity Q1

If there is an expansion in the sugar cane elds, the supply curve shifts to the right. The equilibrium price decreases, and the equilibrium quantity increases.
Price S0 S1

P0 P1

D0 Q0 Q1 Quantity

If both events occur, we have the following three cases

Price S0 S1

P0

D1 D0 Q0 Q1 Quantity

Price S0

S1 P0 P1

D1 D0 Q0 Q1 Quantity

Price S0 S1

P1 P0

D1 D0 Q0 Q1 Quantity