Mathematical Economics

Exercise 1 – Economic Models and Equilibrium Analysis

Answer all the questions. Show your complete solution.

1. Write the following in set notation:

a. The set of all real numbers greater than 34.
b. The set of all real numbers greater than 8 but less than 65.

2. Given the sets S1 = {2, 4, 6}, S2 = {7, 2 ,6}, S3 = {4, 2, 6}, and S4 = {2, 4}, which of the
following statements are true?

a. S1 = S3
b. S1 = R (set of all real numbers)
c. 8  S2
d. 3  S2
e. 4  S3
f. S4  R
g. S1  S4
h.   S2
i. S3  {1, 2}

3. Using the four sets in Question 2, find the following:

a. S1  S2
b. S1  S3
c. S2  S3
d. S2  S4
e. S4  S2  S1
f. S3  S1  S4

4. If the domain of the function y = 5 + 3x is the set {x | 1  x  9}, find the range of the
function and express it as a set.
5. For the function y = -x2, if the domain is the set of all nonnegative real numbers, what
will its range be?
6. In the theory of the firm, economists consider the total cost C to be a function of the
output level Q: C = f(Q).

a. According to the definition of a function, should each cost figure be associated with a
unique level of output?
b. Should each level of output determine a unique cost figure?

7. Find the market equilibrium solution for the following model. Qd = 3 – P2 and Qs = 6P –
4.

8. The market for oranges is characterized by the following model.

Qs = 2P
Qd = 300 – P

a. Solve for the market equilibrium price, P*, and quantity, Q*.
b. Suppose the government imposes a tax of 10 pesos on suppliers. Solve for the after-tax
equilibrium price, PT* and quantity, QT*.
c. Find the price sellers receive after the tax, price buyers pay, tax burden, total tax
collected.
d. Solve for the before- and after-tax consumer surplus, producer surplus, and the
deadweight loss.
e. Graph the before and after-tax market equilibrium.

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 9. Find the equilibrium solution for the two-market model.

Qd1 = 18 – 3P1 + P2
Qs1 = -2 + 4P1

Qd2 = 12 + P1 - 2P2
Qs2 = -2 + 3P2

10. Given a closed economy model:

Y = C + I0 + G 0
C = a + b(Y – T) (a > 0, 0 < b < 1)
T = d + tY (d > 0, 0 < b < 1)

Y = national income, C = consumption, I = investment, G = government spending, t = income

tax rate, b = marginal propensity to consume, a and d are constants representing
autonomous consumption and taxes.

a. Identify the endogenous variables.

b. Find Y*, T*, C*.
c. Find the government and tax multipliers. Interpret the multipliers.
d. Suppose G is endogenous and represented by the function G = gY such that 0 < g < 1.
What is the economic significance of g? Find the new Y*, T*, C*, and G*.
e. Going back to the original equations, suppose the government provides transfer
payments (TR) to households, which becomes part of their disposable income. The new
consumption function is C = a + b (Y – T + TR). Find Y*, T*, C*, and the transfer payment
multiplier. Interpret the multiplier.
f. Going back to the original equations, suppose I = 1,000, G = 800, a = 2000, b = 0.75, d =
500, t = 0.15, solve for the equilibrium Y, T, C.
g. What are the government spending and tax multipliers? Interpret.