# Estimation of the Equilibrium Price, Output, Consumer Surplus

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Sub: Economics                                                                     Topic: Micro Economics

The Estimation of the Equilibrium Price, Output, Consumer Surplus

Question:
Assume the following parameters:

C = Cp + 0.95Y

(MIP)d = 0.25Y – 850r

Ca = 1000 – 40r

NX = 950 – 0.15Y

Ms = 1100

Ip = 800 – 20r

P = 1.00

G = 900

1. (3%) What is the equation for the equilibrium value of Ap?
2. (2%) What is the MLR? k?
3. (2%) What is the equation for the IS curve?
4. (2%) What is the equation for the LM curve?
5. (1%) What is the equilibrium output level?
6. (1%) What is the equilibrium interest rate?
7. (3%) What is the equation for the AD curve?
8. (1%) What happens to equilibrium output if the price level increases by 15%?

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Sub: Economics                                                                     Topic: Micro Economics

Solution:
1. (3%) What is the equation for the equilibrium value of Ap?

C= Cp+ 0.95Y

= 1000-40r +0.95Y

Y= C+I+G+NX

= 1000- 40r+ 0.95Y+ 800- 20r + 900 + 950- .15Y

= 3650 -60r +0.8Y

0.2Y = 3650 – 60r

Y= (1/0.2) {3650 – 60r}

2. (2%) What is the MLR? k?

K = 1/0.2= 5

In the money market,

Md= Ms

0.25Y- 850r= 1100

0.25Y= 1100+ 850r

Y= 1/0.25(1100+ 850r)

MLR= 1/0.25=4

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*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Economics                                                                     Topic: Micro Economics
3. (2%) What is the equation for the IS curve?

0.2Y = 3650 – 60r

This is the equation for IS curve which shows a negative relation between Y and r.

4. (2%) What is the equation for the LM curve?

The equation for LM curve will be,

0.25Y- 850r= 1100

5. (1%) What is the equilibrium output level?

0.2Y = 3650 – 60r……………………..IS equation

0.25Y- 850r= 1100………………………..LM equation

Solving theses two equations we get,

Y= 17144.64

6. (1%) What is the equilibrium interest rate?

Plugging the value in the IS equation we get,

0.2*17144.64 = 3650-60r

3428.92 = 3650-60r

r= 3.68

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*The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
Sub: Economics                                                                     Topic: Micro Economics
7. (3%) What is the equation for the AD curve?

M/P= 0.25Y-850r

Ms=1100

1100/P= 0.25Y- 850r

850r= 0.25Y-1100/P

r= 2.94Y -1.29/P

Plugging the value in the IS equation we get,

0.2Y = 3650 – 60(2.94Y -1.29/P)

= 3650- 176.40Y +77.4/P

176.60Y = 3650+77.4/P

This is the equation for AD curve. The equation shows an inverse relation between Y and P.

8. (1%) What happens to equilibrium output if the price level increases by 15%?

15% increase in price level implies P= 1.15

M/ 1.15= 0.25Y -850r

Md= 0.287 Y- 850r

1100= 0.287
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Description: "a) Calculate the monopoly equilibrium. b) Calculate the consumer surplus. c) Suppose this firm practices two-parts tariffs, I) Calculate the optimal output. II) Calculate the size of the optimal ""membership fee"". "
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