Problem Set #1 Economics 3910 Fall 2015 Name: _________________________________ Instructions: You are to answer all five of the following questions. Each question is worth up to four points. The...

Problem Set #1

Economics 3910

Fall 2015

Name:

_________________________________

Instructions: You are to answer all five of the following

questions. Each question is worth up to

four points. The assignment will be due

at the start of lecture on Tuesday September 10th.

Question #1. In what direction will price and quantity

change in response to:

a) A supply shift

b) A demand shift

c) A simultaneous increase in both

supply and demand

d) A simultaneous increase in supply and

a reduction in demand

Question #2. Some policy makers have argued that the U.S.

government should purchase illegal drugs, such as cocaine, to increase the

price that drug users face. Explain how

the elasticity of demand for illegal drugs relates to the efficacy of the

policy. Would you be more or less likely

to favor this policy if told that the demand for illegal drugs was inelastic?

Question #3. Suppose that the demand for down pillows is

given by QD = 120 – 2P and that the supply of down pillows is given

by QS = -30 + 3P

a) Derive and graph the inverse supply

and inverse demand curve for down pillows

b) Solve for the equilibrium price and

quantity in the market for down pillows

c) Derive the own-price elasticity of

demand at the equilibrium point. Recall

that one can rewrite the expression for the own-price elasticity as

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where,.gif”> is the slope of the demand function with

respect to P.

Question

#4. Suppose that the demand for Diet Coke is

given by QD = 105 – 5P and the supply for Diet Coke is given by QS = 10P.

a) Derive and

graph the inverse supply and inverse demand curves

b) Solve for the

equilibrium price and quantity sold in the market for Diet Coke

c) Suppose that

the supply of Diet Coke were to shift such that at each price, 30 fewer units

are offered for sale. Derive and graph

the new inverse supply curve for Diet Coke.

d) Solve for the

new equilibrium price and quantity in the market

Question #5. Suppose that the demand curve for a product

is given by Q = 300 – 2P + 4I where I is average income (in thousands of

dollars) and that the supply curve for the product is given by Q = 3P – 50

a)

Solve

for the market-clearing price and quantity if I = 25

b)

Derive

the resulting consumer and producer surplus in this market

c)

Suppose

that income was to double, solve for the new market-clearing price and quantity

d)

Derive

the impact of the change in income on consumer and producer surplus