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Sheet 5 Solution

The document provides information about the market for corn in the United States, including estimated demand and supply equations from the USDA. It calculates the equilibrium price and quantity in a free market at $4 per bushel and 1100 million bushels. It also finds the price elasticities of demand and supply. Finally, it analyzes how a $4.50 per bushel government support price would impact the market by creating a surplus of 145 million bushels.

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103 views3 pages

Sheet 5 Solution

The document provides information about the market for corn in the United States, including estimated demand and supply equations from the USDA. It calculates the equilibrium price and quantity in a free market at $4 per bushel and 1100 million bushels. It also finds the price elasticities of demand and supply. Finally, it analyzes how a $4.50 per bushel government support price would impact the market by creating a surplus of 145 million bushels.

Uploaded by

vamcareer
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECON 202 Microeconomics Winter 2008 Economics Department Faculty of Management Technology

Dr. Abdel-Hameed Nawar German University in Cairo

Sheet 5
3. Supply and Demand The U.S. Department of Agriculture is interested in analyzing the domestic market for corn. The USDA's staff economists estimate the following equations for the demand and supply curves: Qd = 1600 - 125P Qs = 440 + 165P Quantities are measured in millions of bushels; prices are measured in dollars per bushel. i. ii. iii. Calculate the equilibrium price and quantity that will prevail under a completely free market. Calculate the price elasticities of supply and demand at the equilibrium values. The government currently has a $4.50 bushel support price in place. What impact will this support price have on the market?

Solution: i. Set Qd = Qs to determine price. 1600 - 125P = 440 + 165P 1160 = 290P P=4 To Obtain Q , substitute into either expression, Qd or Qs : Qd = 1600 - 125(4) Qd = 1600 - 500 Q = 1100 The equilibrium price and quantity are [P* = $4 , Q* = 1100]. ii. For the own price elasticity of demand

125

0.45 (approximately)

For the Own Price Elasticity of Supply


165 0.60 (approximately)

iii. Calculate Qd and Qs at the $4.50 price Qd = 1600 - 125(4.5) Qd = 1037.5 Qs = 440 + 165(4.5) Qs = 1182.5 Surplus = Qs - Qd = 1182.5 - 1037.5 = 145 millions of bushels. Thus, the support price would create an excess supply of 145 million bushels that the government would be forced to buy.

4. Consumer Behavior and Utility Utility function is a formula that assigns a level of utility to individual market baskets. If the utility function of a consumer is:

U=F0.5 C0.5
Complete the following table to find the indifference curve for a utility of 4 and draw the indifference Curve.

Solution: Market Baskets


A B C D E

C U = F0.5 C0.5
4 4 4 4 4

1 16 2 8 4 4 8 2 16 1

* Hint note that . .

Indifference Curve for U=F0.5 C0.5= 4


18 16 14 12 1, 16

Clothing

10 8 6 4, 4 4 2 0 0 5 10 15 20 8, 2 16, 1 2, 8

Food

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