## Description

**Solution Pages:** 18

**Files that you will download:**

Word (.docx) & Excel (.xlsx)

### Questions Covered in the Solution

**Question 1.**Solve Problems 1, 3, 4, 5, 6, 10, and 11 on pages 58-61 of the 7^{th}edition of your textbook.- The European Union (EU) and United States (US) demand and supply equations for corn are:

Q_{D}^{EU} = 70 – 2 P^{EU} Q_{S}^{EU} = 20 + 3P^{EU}

Q_{D}^{US} = 130 – 3P^{US} Q_{S}^{US} = 30 + P^{US}

where Q_{D} and Q_{S} represent the quantities demanded and supplied in both countries (in billions of tons) and P represents the Dollar price per ton of corn in each country.

- Graph the US and European Union supply and demand curves for corn (what are the intercepts?).
- Determine the US and European Union equilibrium prices
**in the absence**of trade. - Find the surplus (or shortage) in both countries at the price of $ 20.

Now assume that **there is free trade** between the European Union and US.

- Determine the international equilibrium price of corn (per ton).
- How much corn is produced and consumed in the European Union and US.
- How much corn is traded between the two regions. Draw graphs to represent the market situation before and after trade.

Suppose now that the **US** **limits its imports** of corn to 14 billions of tons.

- What will be the new equilibrium prices of corn in the European Union and US?
- What are the new domestic production and consumption levels in each region? How much corn is traded?
- The labor supply and demand equations in Mexico and the US are

N_{d}^{mex} = 140 – 2 W^{mex} and N_{s}^{mex} = 80

N_{d}^{US} = 600 – 4 W^{US} and N_{s}^{US} = 260

(Notice: To make the exercise simple, we are assuming that the labor supply curves are perfectly vertical at 80 in México and at 260 in the US).

where N_{d}^{mex} and N_{d}^{US} are the number of workers demanded in Mexico and the US (in millions of workers).^{ }W^{mex} and W^{US} are the yearly wage rates in Mexico and the US (in thousands of dollars). N_{s}^{mex} and N_{s}^{US} are the number of workers supplied in Mexico and the US (in millions of workers).

- What are the equilibrium wages in Mexico and the US.
- Due to the higher US wages (see your answer to part a), millions of Mexican workers want to emigrate to the US. However, the US immigration authorities issue work permits for only 10 million Mexican workers. How will this
**limited flow**of Mexican workers affect wages both in Mexico and the US**(hint: if these flows take place, how****many workers will there be left in México, how many workers will there be in****the US, i.e., how do the labor supply curves shift?).** - If an
**unlimited flow**of Mexican workers is allowed (free movement of labor across borders),**at the end, wages will be equal in both countries (basically, in practice,****there will be just one unified labor market)**. What would be this wage? How many Mexican workers will emigrate to the US? How many Mexican workers will be demanded in the US? At the end, how many workers will there be in México and the US?**(Hint:**.__Find the total labor supply and demand equations__) - With the creation of a Free Trade Zone in North America between the US, Mexico and Canada (the NAFTA agreement), the demand for Mexican food (produced mainly using labor intensive techniques) will increase. This in turn, will increase the demand for labor in Mexico. Assume that the new demand for labor in Mexico is:

N_{d}^{mex} = 240 – 2 W^{mex}

Suppose that at the same time, the Mexican government sets a minimum wage of **80**. Discuss the effects of these two simultaneous events on the **Mexican labor market. **

- The US authorities know that wages for unskilled labor in the US will go down with the immigration of Mexican workers to the US. Suppose that the US authorities want to keep US wages at 69. How many Mexican workers should be allowed to enter to the US (i.e., how many work permits should the US government issue)?
- The market of natural gas is described by the following supply and demand equations:

Qs = 14 + 2 P_{G }+ .25 P_{0} Qd = -5 P_{G} + 3.75 P_{0}

where Qs represent the quantities supplied and demanded of natural gas (in millions of cubic feet), P_{G }represents the price of natural gas (per cubic foot) and P_{0} represents the price of oil (per barrel).

- a) If P
_{0}= 6, find the equilibrium price and quantities of natural gas. - b) Find the new equilibrium price and quantities if P
_{0}doubles (from 6 to 12). - The generalized demand and supply functions for a commodity are

Q_{D} = 400 – 25 P + 0.4 M + 24 P_{R}

Q_{S} = 48 + 12 P –20 P_{I} + 20 F

Q_{D} = quantity demanded; P = price of the commodity; M = average household income; P_{R} = Price of related goods in consumption (complements or subsititutes); Q_{S} = quantity supplied; P_{I} = Factor or input prices; F = Number of suppliers

- Initially, M = $61,140 and P
_{R}= $6. Find the “reduced” demand equation. - Find the inverse demand function (in which P is a function of Q
_{D}). - Initially, P
_{I}= $25 and F = 22. Find the “reduced” supply equation - Find the inverse supply equation (in which P is a function of Q
_{S}). - Will a price of $600 cause a shortage or surplus? How much?
- Find the market equilibrium price and quantity.

Now, let the number of firms increase to 133.

- Find the new supply equation. What are the new equilibrium price and quantity.

### Sample of Solution

**Question # 01 – Text book Questions**

**(a) How many caps could be sold at $ 12 each**

As per the demand equation Q = 2000 – 100*P*, 200 caps can be sold at $ 12 each.

Q = 2000 – 100*12 = 800

**(b) what should the price be in order for the company to sell 1,000 caps?**

As per the above demand equation, the price to sell 1000 caps would be $ 10

- 1000 = 2000 – 100 * P
- P = (2000 – 1000) / 100
- P = $ 10

**(c) At what price would cap sales equal zero?**

The cap would be zero at the price of $ 20 per cap

- 0 = 2000 – 100*P
- P = $ 20

……..

**Question # 01 – Text book Questions**

**(a) How many caps could be sold at $ 12 each**

As per the demand equation Q = 2000 – 100*P*, 200 caps can be sold at $ 12 each.

Q = 2000 – 100*12 = 800

**(b) what should the price be in order for the company to sell 1,000 caps?**

As per the above demand equation, the price to sell 1000 caps would be $ 10

- 1000 = 2000 – 100 * P
- P = (2000 – 1000) / 100
- P = $ 10

**(c) At what price would cap sales equal zero?**

The cap would be zero at the price of $ 20 per cap

- 0 = 2000 – 100*P
- P = $ 20

………

**What is the effect on supply? What are the new equilibrium P and Q?**

With the increase in demand and the new demands curve, supply won’t be affected and it would remain the same. Whereas the equilibrium price and quantity would be changed and the new equilibrium price would be $ 225 while the new equilibrium quantity would be 1250

- 3500 – 10 P = -1000 + 10 P
- P = 4500 / 20
**P $ 225**- Q = 3500 – 10 * 225
**Q = 1250**

**(****f) Suppose new suppliers enter the market due to the increase in demand so the new supply curves Q= -500+10p. What are the new equilibrium P and Q? **

If a new suppliers enter the market and the new supply curve becomes Q = -500 + 10 P the equilibrium points would be changed and the new equilibrium price would be $ 200 while the new equilibrium quantity would be 15,00

……..

**Question # 05**

**(a) Initially, M = $61,140 and P _{R} = $6. Find the “reduced” demand equation.**

When M = $ 61,140 and P_{R }= $ 6, the reduced demand equation would be Q_{ D} = 25,000 – 25 P

- Q
_{ D }= 400 – 25 P + 0.4 M + 24 P_{R} - Q
_{ D }= 400 – 25 P + 0.4 * 61140 + 24 * 6 **Q**_{ D}= 25,000 – 25 P

**(b) Find the inverse demand function (in which P is a function of Q _{D}).**

The inverse demand function would be P = 1000 – 0.04 Q

- Q
_{ D}= 25,000 – 25 P - P = (25,000 – Q) / 25
**P = 1000 – 0.04 Q**

**(c) Initially, P _{I} = $25 and F = 22. Find the “reduced” supply equation**

When P_{I} = $ 25 and F = 22, the reduced supply equation would be Q_{ s }= -12 + 12 P

- Q
_{ s }= 48 + 12 P – 20 P_{I}+ 20 F - Q
_{ s }= 48 + 12 P – 20 * 25 + 20 * 22 **Q**_{ s }= -12 + 12 P

……..

## Reviews

There are no reviews yet.