Problem 4 – Market demand and market supply

Problem 1.
Eva has a budget of $120 per semester. She can spend the budget on either concert tickets at $10 apiece or movie tickets at $6 apiece. Suppose movie tickets decrease in price, first falling to $4, then $3, then $2. Graph the four budget constraints, with movies on the horizontal axis. If Eva’s demand for movies, Q^D, is represented by the function Q^D=60–10P, where P is the price, graph both the demand curve for movies andthe point she will choose on the budget line corresponding to each price.

Problem 2.
Assume that Adam buys only bread and tea.
a) In 2011, Adam earns $100, bread costs $2 per piece, and tea costs $4 per package.
Draw Adam’s budget constraint.
b) Now suppose that all prices increase by 10 percent in 2012 and that Adam’s salary
increases by 10 percent as well. Draw Adam’s new budget constraint. How would
Adam’s optimal combination of bread and tea in 2012 compare to his optimal
combination in 2011?
Task 3 – Budget constraint
Consider a rational consumer willing to buy potatoes and tomatoes. How does the budget constraint look like if the price of potatoes is 30 CZK and the price of tomatoes is 50 CZK and income is 900 CZK?
• Compared to the original situation, what will happen if the price of potatoes rises by 10 CZK?
Show on a different diagram.
• Compared to the original situation, what will happen if the income rises by 300 CZK? Show on a different diagram.
• Compared to the original situation, what will happen if the government introduces rationing (at
most one can buy 20 kg of potatoes and 20 kg of tomatoes)? Show on a different diagram.


Problem 4 – Market demand and market supply
Martin and Martina are the only consumers of tequila on the market. Their individual
demand functions are Q^Martin=100-2P and Q^Martina=90-3P. On the market there is also only
one producer of tequila (the name is unknown) which has the following supply function
Q^Supply=10+5P. Provide three separate graphs (two individual demand functions and the
market demand-supply).
Find market demand and draw it together with market supply. Next, find market
equilibrium. How much are CS, PS, TS?

Problem 5. Consider Q^D=100–2P and Q^S=4P–80. Find the Market Equilibrium,
Consumer Surplus, Producer Surplus, Total Surplus. Draw the graph.