Question

Homework Questions due in Week 3 Part A Demand and Supply - Market Equilibrium 1. The demand and supply functions of a good are given by Qd = 80 - 5P Qs - SP Where P. Qd, and Qs denote price, quantity demanded, and quantity supplied respectively. (0) m) ns of the dand quantity each good. De tax does the (ii) (iv) Find the inverse demand and supply functions Sketch the graphs of the demand and supply functions Find the equilibrium price and quantity The government imposes a tax of €5 on each good. Determine the new equilibrium price and quantity. What proportion of the tax does the consumer pay? Part B National Income Determination - An Introduction 2. In a closed economy with no government intervention, the consumption function is given by: C-75 +0.5Y and planned investment is 100. (0) (in) (iv) What is the Marginal Propensity to Consume? (Define and determine value) Write down the savings function. What is the Marginal Propensity to Save? (Define and determine value) Calculate the equilibrium level of: a. National Income b. Consumption c. Savings Tutorial Questions

Answer 1

1. a.

Inverse demand function: P = 16 - 0.2Q

Inverse supply function: P = 0.2Q

b.

Price 0 10 20 30 40 50 60 70 Quantity a is the point of equilibrium

c.

Equilibrium = Qd = Qs

80-5P = 5P

P= 8

Equilibrium price = 8

Equilibrium quantity = 40

d. Government imposed a tax =€5

New price = 13

New equilibrium

Price 0 10 20 30 40 50 60 70 Quantity

2. a.

Marginal propensity to consume is the rate at which consumption changes in response to a given change in income. It indicates the proportion of additional income that goes to consumption. Here in this function, 75 is the value of autonomous consumption and 0.5 is the Marginal propensity to consume.

b.

Saving function: -75 + 0.5Y

Where Y = income

-75 = value of S when Y =0

c.

Marginal propensity to save: It refers to the proportion of additional income that goes to saving. It is measured as the ratio between change in savings and change in income.

Also, MPS = 1-MPC

MPS = 0.5

d.

Equilibrium level of national income = 350

Equilibrium level of consumption = 250

Equilibrium level of savings = 100

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