Problem 1: Domestic market demand for some good is described by: P = 100 – Q. Domestic supply is described by P = 20 + 2Q.

1. Illustrate demand and supply. Find the equilibrium for this closed market.
2. Suppose that the commodity in question is available on the world market at a constant price of 10. If trade is unrestricted, what is the new equilibrium? How much do domestic producers lose if free trade is allowed?
3. Suppose there is a quota of 50 units allowed in.   Illustrate this situation in a diagram. Is there any deadweight loss? Explain.
4. How do domestic firms benefit from the situation in part 2? Relate your answer to the diagram.

1. From the information provided here in respect of an engineering firm present statements of product mix which will yield the highest profit to the firm.

Products                                                               A                 B                 C

Raw materials per unit (Kg)                              10               6                  15

Labour hours per unit @ $ 1 per hour            15               25               20

Selling price per ($)                                          125             100             200

Maximum production (units)                           6,000          4,000         3,000

100,000kgs of raw material are available at $ 10 per kg. Maximum production hours are 184,000 with a possibility for a further 15,000 hours in overtime basis at twice the normal wage rate.

(b) Would recommend overtime?

Assume there are two firms in the bean sprouts industry and they play Cournot. The inverse market demand curve is given by p(y) = 100−2y_T, where y_T is the total output of all the firms. The total cost function for each firm in the industry is given by c(y) = 4y.

i . Find the marginal revenue and marginal cost equations for the firms.

ii. Determine the best response functions for each firm.

iii. Calculate the Nash equilibrium levels of output for each firm. What is the equilibrium price?

iv. Draw the best response functions in a graph and then show the Nash equilibrium from (ii).

v. Calculate the profits of the firms.

2.

value:
1.25 points

Required information

4a. Suppose the general demand function for cars is Qd = f(P, M, Pgas, Pe, N) such that M = average income of $30,000; Pgas = $2.75 per gallon of gas; Pe = $20,000 expected future price; and N = 700 consumers in the market. Suppose the general supply function is Qs = f(P, P1, Pr, T, Pe, F) such that P1 of average wages is $15.15, Pr = $35,000 the average cost of SUV's, T = 100 the average level of technology and F = 21 is the average number of firms in the industry. Explain the meaning of the general demand function, the general supply function, and the next steps in solving this problem.

Information on four bonds is presented in the table. Each bond has a face value of $100. Each bond that pays a coupon pays it annually.

a) Compute the percentage change in the price of each bond assuming its yield to maturity (YTM) increases by 1%, for example, from 5% to 6%.

b) If you think that bond yields generally will decrease in the next 3 months, which bond would you prefer to own now? Briefly explain.

An investor buys a bond with the following characteristics:

• Maturity - 10 years
• Coupon - 4.5%, paid once per year
• Nominal Value - £100

The yield to maturity at the time of purchase is 8.50%. The investor sells the bond immediately after the sixth coupon payment, when the yield to maturity rises to 9.50%.

• c.Use the modified Macaulay duration to calculate what the price of the above bond would have been immediately after purchase, if the yield to maturity had dropped to 6.5%.

• d.An accurate answer for part (c) is £85.32. Explain why your answer to part (c) differs from this. What are the implications of this effect for bond investors?