Solutions

TO ODD-NUMBERED PROBLEMS

This section contains solutions to all of the odd-numbered problems in the text. Solutions to all of the text problems are contained in the Instructors Manual. Chapter 1 1.1
Price Supply

a. 1.3

d. If P 6, QS 1100, QD 200, ES 900. a. Excess demand is the following at the various prices: P 1 ED 700 100 600 P 2 ED 600 300 300 P 3 ED 500 500 0 P 4 ED 400 700 300 P 5 ED 300 900 600 The auctioneer found the equilibrium price where ED 0. b. Here is the information the auctioneer gathers from calling quantities:

S
5 4 3 2 1 0.5 0 100 300 500 700 900 1,100 Price Demand Quantity

Q 300 PS 2 PD 5 Q 500 PS 3 PD 3 Q 700 PS 4 PD 1 So, the auctioneer knows that Q 500 is an equilibrium. c. Many callout auctions operate this way though usually quantity supplied is a fixed amount. Many financial markets operate with bid and asked prices which approximate the procedure in part b. 1.5
20 15 10 5

5 4 3 2 1 0 200 400 600 800 Quantity

b. The supply points seem to be on a straight Q line. Use D DP 200. So, Q a 200P. At P 1, Q 100 this implies a 100. So the final supply equation is QS 100 200P. Applying the same logic to the demand data yields QD 800 100P. c. If P 0, QS 100 ( 0 because cant have negative supply), QD 800, ED 800.

QS QS QD QD

10

15

20

25

Soluti ons to O dd-Number ed Problems

The algebraic solution proceeds as follows: a. QD 2P 20. QS 2P 4. Set QD QS : 2P 20 2P 4 24 4P P 6: Substituting for P gives: QD QS 8. b. Now QD 0 2P 24. Set QD QS : 2P 24 2P 4 28 4P P 7: Substituting gives: QD QS 10. c. P 8, Q 8 (see graph). 1.7 a.
Y 500 350 300 200

b. Both these points lie below the frontier. c. This point lies beyond the frontier. d. Opportunity cost of 1Y is 2X no matter how much is produced. 1.9 a. X2 4Y2 100. p 2 If X Yp , then 5X 100, and X 20 and Y 20.
Y

XY
5 20

20

10

b. If only X is produced, X 10. So can trade any combination for which X Y 10. c. Because consumers wish X and Y in equal amounts, should have X Y 5. d. Costs of p forgone trade would be a loss of X of 5 20 % 0:53. Loss in Y would be the same.
300 400 500 1,000 X