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QUIZ 1
Econ 212-Section A
Question 1. [5 marks] Suppose the market demand curve for a product is given by
Qd=100-2 P-2U and the market supply curve is given by Qs = -34+5 P +2V. Assume
initially that U=15 and V=10. Note that U and V refer to some exogenous variables.
a) [2.5 marks] Calculate the equilibrium price and quantity in this market? Show your
work.
Answer:
Equating Qd and Qs gives, 70 -2 P = -14 + 5 P, which can be solved for equilibrium
price: P*=12. Substitute P* for P in either the equation for the market demand or the
market supply to obtain equilibrium quantity, Q* = 46.
b) [2.5 marks] Calculate the elasticity of demand and the elasticity of supply at the
equilibrium price and quantity.
Answer:
Elasticity of Demand = –2(12/46), or –0.52.
Elasticity of Supply = 5(12/46) = 1.30.
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Question 2. [5 marks] Consider two goods, A and B. For each of the following
scenarios, develop a utility function U(A,B) that corresponds to the given information.
Also graph and label an indifference curve for each situation.
a) [2.5 marks] The consumer believes that goods A and B are perfect substitutes with five
units of good A equivalent to seven units of good B.
Answer:
U ( A, B )  B 
7
A
5
In a graph with A on the x-axis and B on the Y-axis, an indifference curve for a Utility
level of seven, for above written utility function, is given by the graph of the following
equation
7
B 7 A
5
b) [2.5 marks] The consumer believes that good A and B are perfect complements and
always uses three units of B with five units of A.
Answer:
U ( A, B)  min 3 A,5B
The indifference curves are L-shaped with the corner of the indifference curves lying on a
straight line passing through origin that has slope equal to 3/5 when A is on the x-axis
and B on the Y-axis.
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