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Economic Environment of Business

Economic Environment of Business. Session 3 - exercises chapter 2 - chapter 3. Exercise 2.1. Since X is a normal good, an increase in income will lead to an increase in the demand for X. (the demand curve for X will shift to the right).

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Economic Environment of Business

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  1. Economic Environment of Business Session 3 - exercises chapter 2 - chapter 3

  2. Exercise 2.1 • Since X is a normal good, an increase in income • will lead to an increase in the demand for X. • (the demand curve for X will shift to the right) b. Since Y is an inferior good, a decrease in income will lead to an increase in the demand for good Y. (the demand curve for Y will shift to the right) c. Since goods X and Y are substitutes, a decrease in the price of good Y will lead to a decrease in the demand for good X. (the demand curve for X will shift to the left) • No. The term “inferior good” does not mean • “inferior quality,” it simply means that income • and consumption are inversely related.

  3. Exercise 2.3 a. Qxs = - 50 + 0.5 (500) – 5 ( 30) = 50 units. b. Notice that Qxs = - 50 + 0.5 (50) – 5 ( 30) = -175 however, negative output is impossible. Thus, quantity supplied is zero. • To find the supply function, insert Pz = 30 into • the equation to obtain the supply function • Qxs = - 200 + 0.5 Px • Simply solve this equation for Px to obtain the • inverse supply equation • Px= 400 + 2 Qxs

  4. cont. exercise 2.3 c. Px= 400 + 2 Qxs

  5. Exercise 2.4 a. Good Y is a substitute for X, while good Z is a complement for X. b. X is a normal good. c.Qxd = 1,200- ½ PX + ¼PY - 8 PZ + 0.1 M Qxd = 1,200-½(4,910)+¼(5,900)-8(90)+0.1(55,000) Qxd = $5,000 d. For the given income and prices of other goods, the demand function for good X is : Qxd = 1,200 -½ PX +¼ (5,900) - 8(90) + 0.1(55,000) Qxd = 7,455 -½ PX

  6. cont. exercise 2.4 To find the inverse demand equation, solve Qxd = 7,455 -½ PXfor price to obtain PX = 14,910 –2Qxd

  7. Exercise 2.5 • Solve the demand function for PX to obtain the • following inverse demand function: PX = 115 -¼Qxd • Notice that when PX = $ 35 , Qxd = 320 units. • From part a, we know that the vertical intercept • of the inverse demand equation is 115. • Thus, consumer surplus is: • ½ x (115 – 35) x (320) = $12,800 price 115 D 35 320 quantity

  8. cont. exercise 2.5 • When price decreases to $25, quantity • demandedincreases to 360 units,so • consumersurplus increases to $16,200 ½ x (115 – 25) x (360) = $16,200 • So long as the law of demand holds, a • decrease in price leads to an increase in • consumer surplus, and vice versa. In general, there is an inverse relationship between the price of a product and consumer surplus.

  9. Exercise 2.6 S Price • 50 – P = ½ P - 10. • equilibrium price of $40 • equilibrium quantity 10 units 50 price floor 40 • A price floor of $42 is • effective since it is above • the equilibrium price of $40 20 D Quantity demanded will fall to 8 units, while quantity supplied will increase to 11 units 10 Quantity So there is a surplus of 11- 8 = 3 units

  10. continue exercise 2.6 S Price 50 c. A price ceiling of $30 40 is effective since it is below the equilibrium price of 40 price ceiling Quantity demanded will increase to 20 units, while quantity supplied will decrease to 5 units. There is a shortage amounting to 15 units. 20 D 10 5 20 Quantity Since only 5 units are available at a price of $30, the full economic price is the price such that quantity demanded equals the 5 available units, the full economic price of $45.

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