Name: Vitualla, Shara Elizah B.
Course and Year: BSEconomics-2
Problem Set 1
1.) Given: �� = 20,000 − 400�
�� =− 4,000 + 800�
Required: The equilibrium price and quantity.
�� = ��
20,000 − 400� = − 4,000 + 800�
−400� − 800� =− 4,000 − 20,000
−1,200� −24,000
=
−1,200 −1,200
�∗ = 20
�� = ��
20,000 − 400(20) = − 4,000 + 800(20)
20,000 − 8,000 = − 4,000 + 16,000
12,000 = 12,000
�∗ = 12,000 �����
∴ ��� ����������� ����� �∗ �� �� ����� ��� ����������� �������� �∗ �� ��, ��� �����.
2.) Given: �� = 200 − 5� + 0.002�
�� =− 100 + 8�
Where; Y is the exogenously determined average income.
a.) Required: The equilibrium price and quantity if the average income Y is
45,000 dollars.
��� � = 45,000 �������
�� = 200 − 5� + 0.002(45,000)
�� = 200 − 5� + 90
�� = 290 − 5� ; �� =− 100 + 8�
�� =− 100 + 8�
�� = ��
290 − 5� = − 100 + 8�
−5� − 8� =− 100 − 290
−13� −390
=
−13 −13
�∗ = 30 �������
�� = ��
200 − 5 30 + 90 = − 100 + 8(30)
200 − 150 + 90 = − 100 + 240
140 = 140
�∗ = 140 �����
∴ ��� ����������� ����� �∗ �� � = ��, ��� ������� �� �� ������� ����� ���
����������� �������� �∗ �� ��� �����.
b.) Required: The illustration of demand and supply curves from (a).
c.) Required: The new demand function and its illustration assuming average
income Y rises to 50,000 dollars.
��� � = 45,000 �������
�� = 200 − 5� + 0.002(50,000)
�� = 200 − 5� + 100
�� = 300 − 5�
Finding Intercepts: (�, �)
300,0 0,60
�� = 300 − 5 0 0 = 300 − 5�
5� 300
�� = 300
5
=
5
� = 60
(0,60)
Price
(P)
D (300,0)
Quantity (Q)
d.) Required: The new equilibrium solution and further explanation on the
impact of rise in income.
�� = 300 − 5�
�� =− 100 + 8�
�� = ��
300 − 5� =− 100 + 8�
−5� − 8� =− 100 − 300
−13� −400
=
−13 −13
400
�∗ = �������
13
�� = ��
400 400
300 − 5 =− 100 + 8
13 13
2,000 3,200
300 − =− 100 +
13 13
1,900 1,900
=
13 13
1,900
�∗ = �� ≈ 147 �����
13
���
∴ ��� ��� ����������� ����� �∗ �� �� ≈ ��. �� ������� ����� ���
��
�, ���
��� ����������� �������� �∗ �� ����� �� ≈ ��� ����� (�������
��
�� ��� ������� ���� ����� ����� ������ ����� ��������� �� ����� ��� ���� �������).
Explanation:
The rise in income on the scenario had increased both the values for
the new equilibrium price and quantity. Equilibrium price increased from 30 to
30.77 dollars while the equilibrium quantity increased from 140 to 146. Thus,
in this case, the higher average income led to an increased demand, resulting
to a higher equilibrium price and quantity.
3.) Given:
� = � + �� + ��
� = �� + ���
� = ��
a.) Required: Identify the endogenous and exogenous variables and the
parameters.
Endogenous Variable
The endogenous variables; whose values are determined within the
model above include Y ‘National Income’, C ‘Consumption’, �� ‘Disposable
Income’, and T ‘Tax’.
Exogenous Variable
The exogenous variables in the model above; whose values are
determined outside the certain model include �� ‘Autonomous Investment’,
and �� ‘Government Spending’.
Parameters:
The parameters are �� or the ‘Autonomous Consumption’, � or the
‘Marginal Propensity to Consume (the proportion of disposable income that is
consumed)’, and � or the ‘Tax Rate (the proportion of income that is taxed’.
b.) Required: The equilibrium national income and the multiplier.
Equilibrium Condition
At equilibrium, total output Y equals total expenditure:
� = �+�� + ��
Substituting the consumption function � = �� + ���:
� = �� + ��� +�� + ��
Where �� (Disposable Income) is given by:
�� = � − �
�� = � − ��
�� = �(1 − �)
Substituting for ��:
� = �� +� 1 − � � + �� + ��
� − � 1 − � � = �� +�� + ��
�(1 − � 1 − � ) = �� +�� + ��
�� +�� + ��
�∗ =
1−� 1−�
Multiplier
The multiplier k can be determined from the expression for equilibrium
national income:
1
�=
1−� 1−�
c.) Required: The restrictions on the model’s parameters needed in order for the
model to have a meaningful solution
Marginal Propensity to Consume (MPC,b)
Restriction1: 0 < b < 1
Reason: The marginal propensity to consume (MPC) represents the fraction
of additional income that is spent on consumption. If b=1, all additional income
would be consumed, which is unrealistic because some income is always
saved. If b≥1, consumption would increase more than income, leading to
explosive results. If b≤0, consumption would fall as income rises, which is also
unrealistic. Therefore, b must lie between 0 and 1.
Restriction2: � � − � < �
This condition reinforces that the combined effects of the marginal propensity
to consume and the tax rate do not lead to infinite income levels, maintaining
realism in consumption behavior.
Tax Rate (t)
Restriction3: 0 ≤ t < 1
Reason: The tax rate (t) is a percentage of income taken as taxes. For the
model to be meaningful, t must be non-negative (no negative tax rates) and
less than 1 (since governments don’t tax 100% of income). If t=1, all income
would be taxed, leaving no disposable income for consumption, which is not
feasible.
Denominator Condition in Multiplier
Restriction4: 1−b(1−t) > 0
Reason: Ensures that the denominator in the multiplier
1
�=
1−� 1−�
is positive, allowing for a finite and meaningful national income Y.
Simplifying this inequality:
1−b(1−t) > 0 ⇒ b(1−t) < 1
Positive Autonomous Spending
Restriction5: � + �� + �� > 0
Reason: For the economy to have any level of economic activity, the sum of
autonomous consumption (C₀), investment (I₀), and government spending (G₀)
must be positive. If this sum were zero or negative, it would imply no demand
in the economy, and income would also be zero.
4.) Given: Assume that in problem no. 3
�� = 30, b = 0.92, t = 0.12, �� = 70, and �� = 60
a.) Required: The equilibrium values of the model’s endogenous variables
Endogenous Variables:
National Income (Y)
Consumption (C)
Taxes (T)
Disposable Income (�� )
National Income (Y)
The formula for national income Y in equilibrium is:
�� +�� + ��
�=
1−� 1−�
30 +(70)+(60)
�=
1−(0.92) 1−0.12
160
�=
1 − 0.8096
160
�=
0.1904
100,000
�∗ = ≈ 840.336
119
���, ���
∴ ��� ����������� �������� ������ � �� �� ≈ ���. ���.
���
Consumption (C)
Consumption is calculated using the consumption function:
� = �� + � 1 − � �
100,000
� = (30) + (0.92) 1 − 0.12
119
88,000
� = (30) + (0.92)
119
80,960
� = 30 +
119
84,530
�∗ = ≈ 710.336
119
��, ���
∴ ��� ����������� ����������� � �� �� ≈ ���. ���
���
Taxes (T)
Taxes are calculated as a proportion of income:
� = ��
100,000
� = (0.12)
119
100,000
� = (0.12)
119
12,000
�∗ = ≈ 100.840
119
��, ���
∴ ��� ����������� ��� � �� �� ≈ ���. ���
���
Disposable Income (�� )
100,00
�� = (1 − 0.12)
119
100,00
�� = (1 − 0.12)
119
100,00
�� = 1 − 0.12
119
88,000
��∗ = ≈ 739.496
119
��,���
∴ ��� ����������� ���������� ������ (�� ) �� �� ≈ ���. ���
���
b.) Required: The change in national income if �� changes from 70 to 75.
Calculating the Multiplier given by:
1
�=
1−� 1−�
Substituting the given values (b=0.92 and t=0.12);
1
�=
1 − 0.92 1 − 0.12
1
�=
1 − 0.92 1 − 0.12
1
�=
1 − 0.8096
1 625
�= = ≈ 5.25
0.1904 119
Calculating the Change in Investment (�� )
Δ�� = 75 − 70 = 5
Calculating the Change in National Income (ΔY)
To find the change in national income, we use the formula:
ΔY = k(Δ�� )
Substitute the multiplier and the change in investment:
625
ΔY = (5)
119
3,125
ΔY = ≈ 26.260
119
�, ���
∴ ��� ������ �� �������� ������ � �� �� �� ≈ ��. ��� �������� �����.
���
c.) Required: The change in the equilibrium values of Y,C, and T if �� declines
from 70 to 60 while �� increases from 60 to 70
Calculating the Changes in Investment ��� and Government Spending ���
��� = 60 − 70 =− 10 (investment decreases by 10)
��� = 70 − 60 = 10 (government spending increases by 10)
Calculating the Net Change in Autonomous Spending
Δ Autonomous Spending = Δ�� + Δ�� =− 10 + 10 = 0
Calculating the change in Y:
Since the net change in autonomous spending is 0 zero, the change in
national income (ΔY) will also be 0 zero:
ΔY = k × Δ Autonomous Spending
625
ΔY = ×0=0
119
Calculating the changes in C and T:
Consumption (C)
ΔC = b 1 − t × ΔY
ΔC = 0.92 1 − 0.12 × 0 = 0
Tax (T)
ΔT = t × ΔY
ΔT = 0.12 × 0 = 0
∴ ��� ������ �� �������� ������ � �� �� �, ������ �� ����������� � �� �� �, ��� ���
������ �� ��� �� �� �.
5.) Given:
� = 5 + 0.75��
� = 0.20�
Assume that �� = 100; �� = 110; �� = 90 ��� �� = 105
a.) Required: The equilibrium output.
� = C + I + G + (�� - �� )
Disposable Income ��:
�� = � − �
�� = � − 0.20�
�� = 0.8�
Consumption (C):
� = 5 + 0.75��
� = 5 + 0.75(0.8�)
� = 5 + 0.6�
Substitute to Equilibrium Condition:
� = 5 + 0.6� + 100 + 110 + (90 − 105)
� − 0.6� = 215 − 15
0.4� 200
=
0.4 0.4
� = 500
∴ ��� ����������� ������ � �� ���.
b.) Required: Determine if the budget in this economy balanced
������ ������� = � − �
������ ������� = 0.20� − 110
������ ������� = 0.20(500) − 110
������ ������� = 100 − 110 =− 10
∴ ��� ������ �� ��� ������� �� ��� �������� ����� ����� ��� �� ����� �������.
c.) Required: Determine if the savings is equal to investment
Consumption (C):
� = 5 + 0.6�
� = 5 + 0.6(500)
� = 305
Tax (T):
� = 0.20�
� = 0.20(500)
� = 100
Savings (S):
�=�−�−�
� = 500 − 305 − 100
� = 95
Investment (I):
� = �� = 100
∴ ��� ������� � = �� �� ��� ����� �� ���������� � = ���.
d.) Required: Determine the change in the equilibrium output if the autonomous imports
decline by 20.
New Import M = 85
� = C + I + G + (�� - �� )
� = (5+0.6Y) + 100 + 110+ (90-85)
� = (5+0.6Y) + 100 + 110+5
� − 0.6� = 220
0.4� 220
=
0.4 0.4
� = 550
Let �2 = ��� ����������� ������ = 550
Let �1 = ����� ����������� ������ �� ��. 5 = 500
ΔY = �2 − �1
ΔY = 550 − 500
ΔY = 50 units
∴ ��� ��� ����������� ������ �� ��� ���������� ������ �������� �� �� �� ��� ���
��� ��� ������ �� ��� ����������� ������ �� �� �����.