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Blake Hygema
Dr. Sharp
September 13, 2016
Quant Methods in FRE
Blake Hygema
Dr. Sharp
September 13, 2016
Quant Methods in FRE
Blake Hygema
Dr. Sharp
September 13, 2016
Quant Methods in FRE
4. Answer the following questions about your market model:
a. (4 points) Explain in words why the supply is negative at low prices, 0 at a price
of 5, and increasing thereafter.
i. Supply is negative because price is too low to incentivize suppliers to
produce, the negative amount is representing the law of supply as price is
too low for suppliers to produce the good at that output level. Supply at
zero, with price at $5 represents the fixed cost amount the seller will pay
regardless of how much they produce. Supply increases after the price of
$5 (law of supply) as price increases it becomes more attractive for sellers
to produce more of a good.
b. (4 points) Explain in words why the demand is 0 at a price of 30 and why the
curve is sloping downward.
i. The demand at 0 when the price is at 30 represents the law of demand. The
law of demand is also the reason why the curve is downward sloping.
1. I.e. Very high price=Very low demand
c. (4 points) Where is market equilibrium (both price and quantity)? How do you
know?
i. (60,14) It is the point where the supply and demand schedule meet.
d. (4 points) When prices are low do we have an excess or a shortage situation? Why
is that?\
i. When prices are low we have a shortage situation. More people demand a
good at lower prices than the supply level the producer is willing to
produce resulting in a shortage.
Blake Hygema
Dr. Sharp
September 13, 2016
Quant Methods in FRE
e. (4 points) Where are producer surplus and consumer surplus equal? Is this a
coincidence? Discuss why the curves are non-linear and different from one
another.
i. At price 15 and output level 1350.
ii. This is not a coincidence (no such thing as coincidence in econ!) as this is
when profit is 0, and the market is in equilibrium.