Overview
Answer the following questions thoroughly.
1. What is meant by moral hazard? (1 pt) 2. Consider the general demand function: (3 pts) Qd = 8,000 – 16P + 0.75M + 30PR a. Derive the equation for the demand function when M = $30,000 and PR = $50. b. Interpret the intercept and slope parameters of the demand function derived in part a. c. Sketch a graph of the demand function in part a on a piece of scrap paper. Where does the demand function intersect the quantity-demanded axis? Where does it intersect the price axis? d. Using the demand function from part a, calculate the quantity demanded when the price of the good is $1,000 and when the price is $1,500. e. Derive the inverse of the demand function in part a. Using the inverse demand function, calculate the demand price for 24,000 units of the good. 3. Explain the difference between a movement along a demand curve and a shift in the demand curve. (1 pt) 4. What happens to demand when the following changes occur? (2 pts) a. The price of the commodity falls. b. Income increases and the commodity is inferior. c. The price of a substitute good increases. d. The price of a complement good increases. 5. Suppose that the demand and supply functions for good X are (3 pts) Qd = 50 – 8P Qs = -17.5 + 10P a. What are the equilibrium price and quantity?
b. What is the market outcome if price is $2.75? If a disequilibrium occurs, describe the type and size of the disequilibrium. c. What is the market outcome if price is $4.25? If a disequilibrium occurs, describe the type and size of the disequilibrium. d. What happens to equilibrium price and quantity if the demand function becomes Qd = 59 – 8P? e. What happens to equilibrium price and quantity if the supply function becomes Qs = -40 + 10P (demand is Qd = 50 – 8P)?