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# Supply and Demand Homework

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## 2) Liu Ran

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Homework Problem Set 1

1. Kevin is considering leaving his current job, which pays \$50,000 per year, to start a new company that manufactures a line of special pens for personal digital

assistants. He expects the annual overhead costs and operating expenses to amount to \$3,200,000.

a. What is his opportunity costs, if Kevin decides to embark on his new venture? Opportunity cost is the value of the next-best alternative that is forgone by the decision maker. The opportunity cost is the sum of the explicit cost (Costs that involve a direct monetary value) and the implicit cost. Explicit cost(Costs that not involve a direct

monetary value) for Kevin to embark on his new venture is \$3,200,000, while the implicit cost is \$50,000. Thus, the opportunity costs for Kevein to embark on his new venture is \$3,250,000.

b. How much revenue would he need in order to earn positive accounting profits? Positive economic profits?

In order to earn positive accounting profits, the revenue must greater than the expenses. Hence, Kevin need to earn more than \$3,200,000 to get profits.

Economic profits is the revenue received from the sale of an output is greater than the opportunity cost of the inputs used. In order to achieve that, Kevin need to earn more than \$3,250,000.

2. a. Is Y a substitute or complement for good X?

Y is a substitute of good X. It is because of the positive coefficient of that is +4. If the price of good Y increases, then the quantity demanded for good Y decreases according to the Law of Demand and Demand for good X increases.

b. Is X an inferior or normal good?

X is an inferior good. It is because of the negative of M that is -0.01. If the income increases, the demand for good X actually decreases.

c. Determine the inverse demand function for good X.

d. Calculate and interpret the own price, cross price, and income elasticity of demand.

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( ) ( ) ( ) ( )

Cross Elasticity of Demand :

( ) ( ) ( ) ( ) ( ) ( )

Income Elasticity of Demand :

( )

3. Indicate how each of the following events will shift the demand curve for the Ford Taurus(a midsize car):

a. GM introduces a new line of small, fuel-efficient cars;

The cost of using GM cars will be lower due to its fuel efficiency and this will increase the quantity demanded for GM cars and absorb some of the customers from Ford Taurus. Thus, this will decrease the demand for Ford Taurus and shift the demand curve to the left. However, how far its will shift still depends towards extent they can replace each other. Ford Taurus and GM cars might not perfect substitute.

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b. Following an agreement between the US and Japan, Japanese car manufacturers will reduce their exports of medium sized car to the US;

There will a decrease in supply of medium sized car in US because Japanese car

manufacturers will reduce their exports of medium sized car to the US. The supply curve of Japanese car in US will shift to the left (Supply 1  Supply 2) and the price of Japan cars will increase from AB, the quantity demanded will decrease from YX). Since Ford Taurus (Medium sized cars) is a substitute of the Japan cars, this will increase the demand for Ford Taurus. And the demand curve for Ford Taurus will shift to the right from Demand 1 Demand 2.

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c. The cost of steel increases.

The increase in cost of steel will increase in the cost of production for the car suppliers. The suppliers will feel not attractive to supply and decrease their supply of cars in the market. This will shift the supply curve of cars to the left from Supply 1Supply 2. The price of cars will increase from AB, and the quatity demanded will decrease from SY. There is no shift in the demand curve for the Ford Taurus.

4. Suppose demand is given by Qd = 500 - 15P and supply is given by Qs = 5P. a. What is the market equilibrium price and quantity?

5P = 500 – 15P 20P = 500

=5(25) =125

b. If the government imposes a \$30 price oor(the minimum allow-able price), what is the excess supply? How about a price floor at \$15?

( ) ( )

=100 Excess Supply = 100

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( ) ( )

5. You are the manager of a _rm that receives revenues of \$30,000 per year from product X and \$70,000 per year from product Y. The own price elasticity of demand for product X is -2.5, and the cross-price elasticity of demand between product Y and X is 1.1. How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?

Revenue from X

### 

\$30,000 Revenue from Y

### 

\$70,000 =1.1 If increases by 1%, 1) 2) = 2.5 = New revenue = ( )( ) ( )( ) = (100%+1%)(100%-2.5%)(30000) + (100%+1.1%)(70000) = 29542.5 +70770 = 100312.5 Change in revenue = 100312.5 – (70000+30000) = 312.5

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6. The current price in the market for bananas is \$0.10 per pound. At this price, 1 million pounds are sold per year in Small-town, Malaysia. Suppose that the price elasticity of demand is -5 and the short run price elasticity of supply is 0.05. Solve for the equations of demand and supply, assuming that demand and supply are linear. P =\$0.10 P= \$0.10/ pound (0.1) + a P *b = 500,000 = ( ) a = 950,000

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