economics

Instructor: Ram Sewak Dubey Midterm I October 1, 2020

1. [Market Equilibrium] 40 points

Following table shows information about the demand for apples in the wholesale mar- ket.

Price, P ($/lb) Quantity Qd (lbs) 10 0 8 4 6 8 4 12 2 16

(a) Draw a graph with Price (P) on the vertical axis and Quantity demanded (Qd ) on the horizontal axis?

(b) Write the equation for this inverse demand function. (c) What is the quantity demanded when P = $3/lb?

Following table shows information about the supply of 20 lbs box of apples in the wholesale market.

Price, P ($/lb) Quantity Qs (lbs) 0 0 2 4 4 8 6 12 8 16

(i) Draw a graph with Price (P) on the vertical axis and Quantity supplied (Qs) on the horizontal axis?

(ii) Write the equation for this inverse supply function. (iii) What is the quantity supplied when P = $9/lb?

Next we determine the market equilibrium.

(I) Find out the equilibrium price and quantity. (II) What are the consumers’ surplus, producers’ surplus and the total surplus?

(III) What is the shortage / surplus if the Government imposes a price floor of $7/lb in this market?

(IV) What is the shortage / surplus if the Government imposes a price ceiling of $4/lb in this market?

(V) What is the shortage / surplus if the Government imposes a price floor of $4.5/lb in this market?

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Instructor: Ram Sewak Dubey Midterm I October 1, 2020

2. [Budget Line] 30 points

A person has $250 to spend on two goods (x and y) whose respective prices are $2 per unit and $5 per unit.

(a) Draw the budget line showing all the different combinations of the two goods that can be bought with the given budget.

(b) What happens to the budget line if the budget (money available to spend) increases by 100%.

(c) What happens to the budget line if the price of good x decreases by 50%? (d) What happens to the budget line if the price of good y increases to $10 per unit?

3. [National Income Model] 30 points

Let AE = C + I + G + NX

where AE is the aggregate expenditure, C is the consumption function, I is investment, G is government expenditure and NX is the net export. Given

C = 100 + 0.65Y

where Y is the national income and

I = 100, G = 100 + 0.10Y, NX = 0

(a) Graph the consumption function with Y on the horizontal axis and C on the vertical axis.

(b) Graph the aggregate expenditure function with Y on the horizontal axis and AE on the vertical axis.

(c) Find the equilibrium level of income without using graph analytically. (d) Find the equilibrium level of consumption C.

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