ECO402

Assignment No. 2
ECO-402
Micro Economics
Solution
Part “A”
(a)
Market clearing price condition
Quantity demanded = Quantity supplied
Qd = Qs
1600 -125p = 440 + 165p
1600 - 440 = 165p + 125p
1160 = 290p
P = 1160/290
P = 4
After putting the values of “P” in the quantity Demanded equation
Qd = 1600-125p
= 1600-125(4)
Qd = 1100
After putting the values of “P” in the quantity Supply equation
Qs = 440 + 165p
= 440 + 165(4)
Qs = 1100
(b)
P = 5.50
Qd = 1600-125p
= 1600-125(5.50)
Qd = 912. 5
Qs = 440+165p
= 440+165(5.50)
Qs = 1347.5
(c) Now
Excess supply = Qd –Qs
= 912 .5 -1345.7
= -435
(Q =435) This quantity Government will buy.
Part “B”
Lerner’s index of monopoly power
L = Mp
= P – Mc / P
We drive the formula for Ed from Lerner’s index.
- 1 / Ed = P-Mc / P
Multiply by – both sides
1 / Ed = Mc-P / P
Ed = P / Mc –P
Ed = 70/50-70
Ed = -3.5