Micro and Macro Exercise Essay
Chu Nguyen Quynh Huong
Assignment 1 – Microeconomics
1. The Basics of Supply and Demand (Pindyck – Chapter 2): Excercises 9, 10 (page 63).
a) The original demand is
And supply is
The 20-percent increase in demand means that the new demand is 120 percent of the original demand, so the new demand is
Q ́D =1.2QD
Q ́D =1.2(18–3P)=21.6–3.6P.
The new equilibrium is where Q ́D equals the original supply: 21.6 – 3.6P = - 6 + 9P
The new equilibrium price is P* = $2.19 per pound. An increase in demand of 20 percent, therefore, increases price by 19 cents per pound, or 9.5 percent.
b) Using the new price of $2.19 in the supply curve, …show more content…
b) Do the same calculations as above but now using the long-run elasticities:
ES = 0.4
ED = - 0.4: ES = d(P*/Q*)
ED = - b(P*/Q*) implying 0.4 = d(50/20) ⇨ 0.4 = - b(50/34).
So d = 0.16 and b = 0.27.
Next solve for c and a:
Sc = c + dP and D = a – bP implying 20 = c + 0.16(50) and 34 = a - 0.27(50).
So c = 12 and a = 47.5.
c) OPEC’s supply increases from 14 bb/yr to 16 bb/yr as a result.
Add 16 bb/yr to the short- run and long-run competitive supply equations. The new total supply equations are:
Short-run: S’T=16 + Sc = 16 + 18 + 0.04P = 34 + 0.04P, and
Long-run: S”T= 16 + Sc = 16 + 12 + 0.16P = 28 + 0.16P
These are equated with short-run and long-run demand, so that: 34 + 0.04P = 35.5 - 0.03P implying that P = $21.43 in the short run
28 + 0.16P = 47.5 + 0.27P implying that P = $45.35 in the long run.
2. The Analysis of Competitive Markets (Pindyck – Chapter 9): Exercise 1 (page 343).
a) in free market equilibrium: Ls = LD = 80-10w
If the minimum wage is $5: LD = 30
The number of people be employed is 30 million workers
b) w denote the wage received by the employee
Ls = 10ws
Ws – wd = 1 = s
LD = 80 – 10(ws-1) = 90 – 10ws
Ls = LD ⇨ 10ws = 90 – 10ws ⇨ ws = 4.5
The new equilibrium will be given by intersection of the old supply curve with the new demand curve, ws= $4.5/ hour
L = 10w =