ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY
SCHOOL OF ELECTRICAL ENGINEERING AND COMPUTING
DEPARTMENT OF SOFTWARE ENGINEERING
COURSE: INTRODUCTION TO ECONOMICS
(SOSC-2002)
Name ID
1. Latera Nigatu…………..UGR/22988/13
2. Desalegn Sisay………...UGR/23232/13
3. Gadisa Gobosho……….UGR/22874/13
4. Ibsa Belay……………...UGR/22724/13
5. Yishak Kidane………….UGR/23029/13
Submission date: dec.29, 2024
Instruction: Work out the following questions; by showing the necessary steps clearly
and neatly.
1. Consider the market for gasoline in a county. Units of quantity & price are in thousands of
gallons & $/gallons, respectively. Suppose the gasoline demand is given by: Qd = 2000 – 200P;
where Qd is quantity demanded and P is Price. Moreover, we have the following information
about the linear supply function:
Market research shows that for an increase in price by $1/gallon, quantity supplied
increases by 100 thousand gallons;
In addition, when the price is $1/gallon, 900 thousand gallons of gasoline are supplied to
that county.
a. Use the information to find the supply function, i.e., determine the numbers - a & b in the
supply equation: Qs = a + bP where Qs is quantity supplied & P is price.
b. Plot the demand & supply curve with quantity on x-axis and price on y-axis. Clearly write
the intercepts on both axes, & denote the area of consumer surplus & supplier (producer)
surplus.
c. Find the equilibrium price & quantity & the value of consumer and producer surplus.
d. Suppose there is a pipeline break in some point on the supply line in the country, causing a
gasoline shortage. Engineers have determined that pipeline capacity is reduced by 300
thousand gallons – meaning that, at every price level, there are 300 thousand fewer gallons of
gasoline supplied to that County.
i. Which curve (demand or supply) is shifted? Which direction (leftward or rightward)?
ii. Determine the equation (demand function or supply function) of the shifted curve.
iii. As you did in (b) above, draw/plot the demand & supply curve after the pipeline
break, clearly write the intercepts on both axes, & compare the shifts.
iv. Determine the equilibrium price & quantity & calculate the value of consumer &
producer surplus after the pipeline break.
Answer:
Part (a): Determine the Supply Function Qs=a+bP
We are given the following information:
1. For every $1 increase in price, quantity supplied increases by 100 thousand gallons.
This means the slope b=100.
2. At a price of $1, the quantity supplied Qs=900 thousand gallons.
Using the general form of the supply function Qs=a+bP
Substitute b=100, P=1, and Qs=900:
900=a+100(1)
900=a+100 ⟹ a=800
Thus, the supply function is: Qs=800+100P
Part (b): Plot the Demand and Supply Curves
Demand Function: Q d=2000−200P
Supply Function: Qs=800+100P
Find the Intercepts:
1. For the Demand Curve Qd=2000−200P:
When P=0: Qd=2000. (Horizontal intercept)
When Qd=0: 0=2000−200P ⟹ P=10. (Vertical intercept)
2. For the Supply Curve Qs=800+100P:
When P=0: Qs=800. (Horizontal intercept)
When Qs=0Q: 0=800+100P ⟹ P=−8(Vertical intercept, not relevant for the graph since
P≥0)
Plot the Curves:
The demand curve starts at (Q,P)=(2000,0) and ends at (Q,P)=(0,10).
The supply curve starts at (Q,P)=(800,0) and extends with a positive slope.
Consumer and Producer Surplus Areas:
Consumer surplus is the area above the equilibrium price and below the demand curve.
Producer surplus is the area below the equilibrium price and above the supply curve.
Part (c): Find the Equilibrium Price and Quantity
At equilibrium, Qd=Qs.
2000−200P=800+100P
2000−800=200P+100P ⟹ 1200=300P
P=4
Substitute P=4 into either Qd or Qs to find Q:
Qd=2000−200(4)=2000−800=1200
Qs=800+100(4)=800+400=1200
Thus, the equilibrium price and quantity are:
P∗=4 and Q∗=1200
Consumer Surplus:
The area of the triangle under the demand curve and above the equilibrium price:
Consumer Surplus=1/ 2×base×height\text
Base = Q∗=1200 , Height = 10−4=6
Consumer Surplus=12×1200×6=3600 (thousands of dollars)
Producer Surplus:
The area of the triangle above the supply curve and below the equilibrium price:
Producer Surplus=12×base×height
Base = Q∗=1200, Height = 4−0=4
Producer Surplus=12×1200×4=2400 (thousands of dollars)
Part (d): Effect of Pipeline Break
1. Which Curve is Shifted and in Which Direction?
The supply curve shifts leftward because fewer gallons are supplied at every price level.
2. Equation of the Shifted Supply Curve:
Since the supply decreases by 300 thousand gallons at every price level:
Qs′=(800−300)+100P=500+100P
Plot the Shifted Supply Curve:
New intercepts:
When P=0 : Qs′=500.
When Qs′=0: 0=500+100P ⟹ P=−5
The supply curve shifts leftward by 300 units.
3. Find New Equilibrium Price and Quantity:
New intercepts:
When Qs′=0: 0=500+100P ⟹ P=−5
When P=0 : Qs′=500.
The supply curve shifts leftward by 300 units.
4. Calculate New Consumer and Producer Surplus:
At equilibrium, Qd=Qs′:
2000−200P=500+100P
2000−500=200P+100P ⟹ 1500=300P
P′=5
Substitute P′=5 into Qd or Qs′ to find Q:
Qd=2000−200(5)=2000−1000=1000
Qs′=500+100(5)=500+500=1000
New equilibrium:
P∗=5 and Q∗=1000
5. Calculate New Consumer and Producer Surplus:
Consumer Surplus:
Consumer Surplus=12×base×height
Base = Q∗=1000 , Height = 10−5=5
Consumer Surplus=12×1000×5=2500 (thousands of dollars
Producer Surplus:
Producer Surplus=12×base×height
Base = Q∗=1000, Height = 5−0=5:
Producer Susssrplus=12×1000×5=2500 (thousands of dollars)
Summary of the result
Scenario P Q Consumer Producer surplus
surplus
Before pipelines 4 1200 3600 2400
break
After pipeline 5 1000 2500 2500
break
2. Suppose a consumer consuming two commodities X and Y has the following utility function
0.4 0.6 U X Y . If price of good X and Y are 2 and 3 respectively and income constraint is
$500.
a. Find the quantities of good X and Y which will maximize utility.
b. Total utility at equilibrium.
c. Find the MRSX ,Y at optimum point.
d. Show how a rise in income to $1000 will affect the quantity of X and Y.
ANSWER: