Cairo University

Faculty of Economics and Political Sciences

Economics Department
Mathematical Economics II

Sheet 2
General Equilibrium Analysis
1) If you have the following supply and demand functions:
Qd1 = 10 – 2P1 + P2
Qs1 = -2 + 3P1
Qd2 = 15 + P1 – P2
Qs2 = -1 + 2P2
a) Find the equilibrium prices.
b) Find the equilibrium Quantities.
Solution:
Equilibrium conditions:
Qd1 = Qs1 Qd2 = Qs2
10 – 2P1 + P2 = -2 + 3P1 15 + P1 – P2 = -1 + 2P2
10 + 2 – 2P1 – 3P1 + P2 = 0 15 + 1 + P1 – P2 – 2P2 = 0
12 – 5P1 + P2 = 0 16 +P1 – 3P2 = 0 (1)
P2 = 5P1 – 12
Substitute by P2 in (1):
16 + P1 – 3(5P1 – 12) = 0
16 + P1 – 15P1+ 36 = 0
52 – 14P1 = 0
52 = 14P1
26
P1 =
7
Substitute by P1 in P2 :
26 46
P2 = 5( ) – 12 =
7 7

Substitute by P1 in Qs1 to get Q1 :

1
 26 64
Q1 = -2 + 3( )=
7 7
Substitute by P2 in Qs2 to get Q 2 :
46 85
Q 2 = -1 + 2( )=
7 7

2) Find the equilibrium quantities and prices for each of the following models:
a) Qd1 = 18 – 3P1 + P2 and Qs1 = -2 + 4P1
Qd2 = 12 + P1 – 2P2 and Qs2 = -2 + 3P2
b) Qd1 = 50 – 8P1 – 2P2 and Qs1 = -8 + 10P1
Qd2 = 100 – 5P1 – 7P2 and Qs2 = -20 + 9P2

3) Identify whether the following statements are true or false with justification:
a) The general equilibrium models are more realistic and practical than the partial
equilibrium ones.

b) In case of n-commodity market model, equilibrium condition involves n-1

equations.

c) In a Walrasian type of general equilibrium model, the model has a total of 3n

equations that can be reduced to n simultaneous equations.
d) To guarantee the existence of a unique solution in general equilibrium models,
equations must only be consistent and functionally independent.

e) In general equilibrium models, unique solutions cannot be achieved in case of

functionally dependent equations.