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Principles ProblemSet4

This document contains conceptual questions, practice problems, and additional questions related to principles of economics from Universidad Carlos III de Madrid. It addresses topics such as market equilibrium, how equilibrium changes with income and technology, consumer and producer surplus, and efficient allocation. Practice problems involve calculating equilibrium price and quantity for supply and demand functions and examining how surpluses change with shifts in demand or supply. Additional questions test understanding of how equilibrium is affected by factors that change supply or demand.

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antialonso
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34 views

Principles ProblemSet4

This document contains conceptual questions, practice problems, and additional questions related to principles of economics from Universidad Carlos III de Madrid. It addresses topics such as market equilibrium, how equilibrium changes with income and technology, consumer and producer surplus, and efficient allocation. Practice problems involve calculating equilibrium price and quantity for supply and demand functions and examining how surpluses change with shifts in demand or supply. Additional questions test understanding of how equilibrium is affected by factors that change supply or demand.

Uploaded by

antialonso
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Universidad Carlos III de Madrid – Departament of Economics

Principles of Economics – Problem Set 4

Conceptual Questions

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 simultaneously.

3. What is the consumer surplus and producer surplus and how do we calculate them?
Given the supply, consumer surplus tends to be relatively small compared to producer
surplus when the demand curve is more elastic? Explain why, and indicate if the same
reasoning applies to 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 earns
more in returning to the equilibrium in each of these cases, the consumer or the producer?

Problems

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.
b) 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" 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.

7. If the demand and supply curves of a market are, respectively, Q=10 - P and Q = 2 + P.
a) The equilibrium price is 3.
b) If the price is 2, the market is in excess supply.
c) If the price is 5, the consumer surplus is lower than the one in equilibrium.
d) None of the previous answers.
1
8. In te market of the good x there are 1000 identical consumers, each consumer has a
demand function Q = 15 – 1,5P. In addition, there are 100 identical producers, each of
them with supply function Q = 15P.

a) Find the aggregated demand and supply functions and the equilibrium of the market.
b) Suppose that the income of the consumer increases, and that the new aggregated
demand curve of the market is Q = 18000 – 1500P. Find the new equilibrium.
c) Compute the consumer surplus in the initial equilibrium.
d) Compute the producer surplus in the final equilibrium.

Other Questions

1. The bad weather reduces the catch of fish and causes that people do not shop. What
happens to the equilibrium price and quantity in the fish market?
a) The price and quantity decrease.
b) The price increases, whereas the quantity decreases.
c) The price decreases, but the effect on the quantity is ambiguous.
d) The quantity decreases, but the effect on the price is ambiguous.

2. When in a competitive market:


a) There is an excess of supply, the price rises.
b) There is an excess of demand, the price falls.
c) The market is in equilibrium; the price may either rise or fall.
d) The market is in equilibrium, the excess supply is zero and the excess demand is zero.

3. If you set a minimum wage below the equilibrium wage, the result will be:
a) An excess of labor demand.
b) An excess of labor supply.
c) A decrease in the equilibrium wage.
d) There is no effect on the labor market.

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