Question

Consider Market Model: Demand: Supply: Q= a - bP Q=-c+dP (a, b > 0) (c, d > 0) * 1) Discuss in words the meaning of each equation in the model (3 points); 2) Find the equilibrium levels of P* and Q* (3 points); 3) Draw qualitative conclusions about changes in P* and Q* when each of the parameters change. (Qualitative conclusion shows the direction of change.) Explain economic meaning of these changes. (Total 6 points: 3 points for P*; 3 points for Q*); 4) If a= 10, c = 5, b = 2; d = 3, draw quantitative conclusions about changes in P* and Q* when each of the parameters change. (Quantitative conclusion shows the magnitude of change.) Explain economic meaning of these changes. (Total 6 points: 3 points for P*; 3 points for Q"); 5) Show your conclusions in (4) graphically. Note: Carefully label everything on your graphs. Make the graphs neat and understandable. Points will be deducted for missing labeling and for hard-to- understand graphs. (Total 8 points: 4 graphs -- change in a; change in b; change in c; change in d; -- 2 pts each).

Answer 1

a) Q is Quantity demanded in first equation and Quantity supplied in the second equation. P is the price.

a is the consumption when P is zero, b is the slope of the demand curve

c is the quantity supplied at the P is zero, d is the slope of supply curve

b)
SOMS Page No. Date 6) For Equilibrium Supply - Demand 2017 Qs = QA a-bla – ctd P = atc - brd 8 = a- batch bud a abtad-ba- bc a btd = ad-bcu bed & Equilibrium = Q = adobe R- bed ats b+d

SOMS Page No. Date 6) For Equilibrium Supply - Demand 2017 Qs = QA a-bla – ctd P = atc - brd 8 = a- batch bud a abtad-ba- bc a btd = ad-bcu bed & Equilibrium = Q = adobe R- bed ats b+d

3) and 4)

Date (4) a= to, c = 5, 3+2, d=3 a* - ad bc - 30-10 24 btd 2 +3 bed 3 X 10*,p*) is a falls to 8 from 10 hah

5) Quantitative Conclusions:

Date Quantitative conclusions : " for a : 3 det etter badoo de) = (hd) - (bed) bid (6+ 16 - ap* I brd da as both dat and I Pk yo da da 3 they have a positive 26 relationship with a As ab increases awlona Qt and p* increases As a decreases & Q* and p* decreases. 8(3) – 2x5 - 24-10 8 + S B+S- s

for b: - 5(b+d) on the bande Both dpt and dat co Both Q* and p* will relationship to tweet have a negature

for c: - a-b(b+d) al- b - bed) brd * bad atc ) dc bed (btd) al (bed) Abbed a dotico, det so Q has a negative relationship with 0 0 e has a positive relationship Inwor with cooper

for d det del ad bc) ate -1 lat) - openen & Qt has a positive with relationshy a & I px has a with d. negative relationshy