Solution problem set 4, Ejercicios de Administración de Empresas

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«Universidad Carlos 11 de Madrid - Departament of Economics Principles of Economics — Class 2012-2013 Problem Set 4 Conceptual Questions (For Grading) 1. Define market equilibrium and indicate what happens when the price is higher than the equilibrium price and when the price is lower than the equilibrium price. 2. Discuss how the market equilibrium of a good change when income increases and when there is a technological improvement. Consider the effect of each of these changes on the equilibrium separately, keeping everything else constant, and when both changes occur simultancously. 3. What is and how to calculate the consumer surplus and producer surplus? Given the supply, why consumer surplus tends to be relatively minor compared to producer surplus the more elastic is the demand? Does the same reasoning apply to the supply, given the demand? 4. Why do we say that the resulting allocation of market equilibrium is efficient? Why the allocation associated with excess supply or excess demand is not efficient? Who carns more in the return to the equilibrium in each of these cases, the consumer or the producer? Problems (For Grading) 1 In the market of butter, the supply function is Q = 2P — 4 and the demand function is Q = 60 — 2P. a) Draw the function of supply and demand for butter and find the equilibrium of this market, hb) Compute the consumer's surplus and the producer's surplus corresponding to the equilibrium. c) Suppose that the price of a substitute of the butter decreases, how does the market equilibrium change? Show the effect of that situation on the consumer and producer surplus. 6, Imagine that the market for "Renault Twingo”, with increasing supply and decreasing demand is in equilibrium. Assume that the price of "Seat Ibiza” increases ("Seat Ibiza” is a substitute of "Renault Twingo”) and at the same time, the wages of workers in the factory of the "Renault Twingo” increase, The impact of both factors on the market for "Renault Twingo” is such that: a) The equilibrium quantity increases. b) The equilibrium quantity decreases. c) The equilibrium price increases . d) The equilibrium price decreases. vale ss trabajo de casa seo 1 2 J Load A n [3] (1 AT COMES UE TA 6. c) The equilibrium price increases . 7. <) Wf the price is 5, the consumer surplus is lower than the one in equilibrium. 8. a) QD = (15 —1,5p) x 1.000 = 15.000 — 1.500P. QS = (15p) x 100 = 1.500P QD - QS : 15.000 — 1.500P=1.500P — 15.000 -3.000P — (P*=5;Q*-7.500) o, b) Equilibria: Q”=Q*: 18.00 — 1.500P= 1.500P_ (P*=6. Q'=9.000) o 3 (0*=7.800 Q**=9.000 15.00 -- Q o id Q*=7.500 15.00 Q o