Problem Set #1
Due: Thursday, January 31
1. (5 points) Suppose that the long-run world demand and supply elasticities of crude oil
are –0.906 and 0.515, respectively. Suppose further that the current long-run
equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels
per year.
a. Derive the (linear) long-run demand and supply equations.
b. Suppose the long-run supply curve you derived above consists of competitive
supply plus the quantity of OPEC supply. If the long-run competitive supply (not
including OPEC’s production) is:
QS = XXXXXXXXXX29p,
what must be OPEC’s level of production in this long-run equilibrium to maintain
the price of $30?
2. (5 points) Suppose a market is supplied by domestic producers and an international
supply. The domestic (inverse) supply curve is given by the p = 5 + 2Q, and the foreign
supply curve is given by p = 15.
a. Draw on a graph the total supply curve (please label clearly).
b. On a second graph, draw the total supply curve if the government imposes a
quota of 10 on foreign supply.
3. (5 points) A recent newspaper article points out that the price of economics textbooks is up 15 percent this year over last year, and yet the number of textbooks sold is higher
this year. This article claims that these figures show that the law of demand does not
apply to textbook. Is there a flaw in this argument? Explain your answer and illustrate
with a graph. Assume that a textbook is not a Giffen good.
4. (5 points) Suppose that the inverse demand function for movies is p = 120 – Q1 for
college students and p = 120 – 2Q2 for other town residents.
a. What is the town’s total demand function (Q = Q1 + Q2) as a function of price, p?
b. Use a diagram to illustrate your answer.
5. (5 points) Suppose the market for corn is given by the following equations for supply
and demand:
QS = 2p - 2
QD = 13 - p
where Q is the quantity in millions of bushels per year and p is the price.
a. Calculate the equilibrium price and quantity. Sketch the supply and demand
curves on a graph indicating the equilibrium.
b. If a price floor is imposed at $7 per bushel, will there be a surplus or a shortage?
What is the quantity of excess supply or demand that results? Draw a graph to
show this.