ECN 502

Topics: Supply and demand / Pages: 5 (1168 words) / Published: Nov 5th, 2013
1) Problem 6: Suppose demand and supply are given by Qd = 60 – P and Qs = P – 20.
a) What are the equilibrium quantity and price in this market?
b) Determine the quantity demanded, the quantity supplied and the magnitude of the surplus if a price floor of $50 is imposed in this market.
c) Determine the quantity demanded, the quantity supplied and the magnitude of the shortage if a price ceiling of $32 is imposed in this market.

Solution:
a. For the equilibrium
i) Price: Qd = Qs
60-P=P-20 => P= $40. ii) Quantity: Equilibrium quantity can be found substituting the value of P found in (i).
Q = 60-40 = $20

b. i) Quantity Demanded = Qd= 60-50= 10 ii) Quantity supplied = Qs= 50-20 = 30 iii) Magnitude of surplus = Qs- Qd = 30-10 = 20

c) i) Quantity Demanded = Qd= 60-32= 28 ii) Quantity supplied = Qs= 32-20 = 12 iii) Magnitude of surplus = Qd- Qs = 28-12 = 16

2) Problem 11: You are the manager of a midsized company that assembles personal computers. You purchase most components-such as random access memory (RAM) – in a competitive market. Based on your marketing research, consumers earning over $80000 purchase 1.5 times more RAM than consumers with lower incomes. One morning, you pick up a copy of wall street journal and read an article indicating that input components for RAM are expected to rise in price, forcing manufacturers to produce RAM at a higher unit cost. Based on this information, what can you expect to happen to the price you pay for RAM?

Solution:
Based on the information given, a general equation can be derived as below:
Let Cg be the purchase of consumer with income greater than $80000 and Cl be the consumer with income less than $80000, and R be the quantity of RAM. Cg – Cl = 1.5 R
As per the article, the Ram will be produced at a higher unit price, but the article doesn’t state whether selling price of RAM will increase or not. The RAM producers may continue working with a lower profit margin in

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