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Assignment 1 Question 5 Answers
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, and Y 2
X = a + b Y 1
X = c โ d Y 2
where a, b, c, and d, are positive, known constants. The objective is to find values of X , Y 1
, and Y 2
for
which both equations are satisfied and as well Y 1
2
a. How many unknowns are there? Clearly identify them. How many equations are there?
Clearly identify them. Note that there are as many equations as unknowns. (If you do not see
this, and you should think more carefully). Thus, a unique solution exists. (Try to convince
yourself that having only (1) and (2) makes it impossible to solve for the unknown variables,
by equating X from (1) to X from (2) and trying to solve for Y 1
and Y 2
There are three unknowns: Y 1
2
, and X
There are three equations:
X = a + b Y 1
X = c โ d Y 2
1
b. Replace both sides of the third equation (which one is it?) using expressions (1) and (2) to
solve for X.
1
2
c. After solving for X , find the values of Y 1
and Y 2
and verify whether the third equation (again,
which one is it?) is satisfied.
Using ๐ =
๐๐+๐๐
๐+๐
and equation (1):
1
Using ๐ =
๐๐+๐๐
๐+๐
and equation (1):
2
1
2
The intersection of the two curves has the coordinates (
๐๐+๐๐
๐+๐
๐โ๐
๐+๐
d. Now, replace Y 1
with Q
S
representing quantity supplied, a with 200, b with 2, Y 2
with Q
D
representing quantity supplied, c with 400, d with 3, and X with P representing price. This
gives you a system of supply and demand for a good. Re-write expressions (1) and (2) using
this information. How many unknown variables and how many equations do you have?
e. To find the equilibrium and solve for equilibrium values of Q
D
S
, and P , what other
condition do we need? [ Hint: Think about our discussion in class and the fill the blank here
to find out what other condition you might need: โIf quantity demanded is more than quantity
supplied, the price will ________. If quantity demanded is less than quantity supplied, then
price will _________. So, price will not change only if quantity demanded _________
quantity supplied. This is how we define equilibrium: a condition under which variables in
the model remain stable and do not change. We call this additional equation market-clearing
condition .โ]
D
S
โIf quantity demanded is more than quantity supplied, the price will increase. If quantity
demanded is less than quantity supplied, then price will drop. So, price will not change only if
quantity demanded equals quantity supplied. This is how we define equilibrium: a condition
under which variables in the model remain stable and do not change. We call this additional
equation market- clearing condition.โ
f. Given the system of supply and demand and the market-clearing condition, solve for
equilibrium values of Q
D
S
, and P.
D
S
g. Show the supply and demand curves on a grid putting price on the vertical axis and clearly
identify the equilibrium price and quantity.