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QUIZ 1
Section B
Question 1. [5 marks] Suppose the market demand curve for a product is given by
Qd=150-15 Pa+10Pb and the market supply curve is given by Qs = -250+10 P a+ 5Pb.
a) [3 marks] What are the ranges of Pa and Pb if the equilibrium prices and quantity are positive
in this market?
150-15 Pa+10Pb= -250+10 Pa + 5Pb
Pa=(400+5 Pb)/25
=(80+ Pb)/5
Pb=5Pa-80
Pa>16
Q=150-15*(80+ Pb)/5+10Pb
=150-3*(80+ Pb)+10Pb
=150-240+7 Pb
=7 Pb -90
Pb>12.86
Q=150-15Pa+10Pb
=150-15Pa+10(5Pa-80)
=35Pa-650
Pa>18.57>16
b) [2 marks] what is the price elasticity of demand for good a with respect to its own price and
what is the cross-price elasticity of demand for good a with respect to price of the other good, Pb?
(at the equilibrium, when Pa=20)
Pb=5Pa-80=20 Q=7*20-90=50
Elasticity =
Qd  P 


P  Qd 
Ea=-15*20/50= -6
Eb=10*20/50= 4
Question 2 [5 marks] Consider the following two utility functions: U1=max [3A, 2B], U2=
A0.5B0.5. Please graph the ONE indifference curve for EACH utility function.
U1:
U2