NAME:

Problem Set #1
Micro I Winter Term 2013
Section C
Due Date: Saturday, September 21st, 2013 by 9:45 a.m. Drop the problem set off at
building J11-C.
Instructions: Students may work in pairs on problem sets. Each student must turn in
his/her OWN response to the problem set (i.e. one assignment with two names on it will
not be accepted). The pairs assignments should be turned in stapled together.
NO LATE PROBLEM SETS WILL BE ACCEPTED.
1) The 9/11 terrorist attacks caused the U.S. airline travel demand curve to shift left by
an estimated 30% (Ito and Lee, 2005). Use the demand and supply diagram to show
the likely effect on price and quantity (assuming the market is competitive). Indicate
the magnitude of the likely equilibrium price and quantity effects-for example, would
you expect equilibrium quantity to change by about 30%? Show how the answer
depends on the shape and location of the supply and demand curves.

2) The U.S. Bureau of Labor Statistics reports that the average salary for postsecondary
economics teachers in the Raleigh-Durham-Chapel Hill metropolitan area, which has
many top universities, rose to $ 105, 200 (based on a 52-week work year) in 2003.
According to the Wall Street Journal (Timothy Aeppel, Economists Gain Star
Power, February 22, 2005, A2), the salary increase resulted from an outward shift in
the demand curve for academic economists due to the increased popularity of the
economics major while the supply cure of PhD economists did not shift and the
quantity supplied did not change.
a) If this explanation is correct, what is the short-run price elasticity of supply of
academic economists?
b) If these salaries are expected to remain high, will more people enter doctoral
programs in economics? How would such entry affect long-rum price elasticity of
supply?

3)What effect does a $1 specific tax have on equilibrium price and quantity, and what is
the incidence on consumers, if
a.The demand curve is perfectly inelastic?
b.
The demand curve is perfectly elastic?
c.The supply curve is perfectly inelastic?
d.
The supply curve is perfectly elastic?
e. The demand curve is perfectly elastic and the supply curve is perfectly
inelastic?
Use graphs and math to explain your answers.

4) Suppose that the inverse demand function for movies is p=120-Q1 for college
students and p=120-2Q2 for other town residents. What is the towns total demand
function (Q=Q1+Q2 as a function of p)? Use a diagram to illustrate your answer.

5) Calculate the price and cross price elasticities of demand for coconut oil. The coconut
oil demand function (Buschena and Perloff, 1991) is Q = 1,200 9.5P + 16.2 pp +
0.2Y, where Q is the quantity of coconut oil demanded in thousands of metrics tons
per year, p is the price of coconut oil in cents per pound, pp is the price of palm oil in
cents per pound, and Y is the income of consumers. Assume that p is initially 45 cents
per pound, pp is 31 cents per pound, and Q is 1,275 thousand metric tons per year.

6)Harding Enterprises has developed a new product called the Gillooly Shillelagh. The
market demand for this product is given as follows:
Q = 240 - 4P
a.

At what price is the price elasticity of demand equal to zero?

b.

At what price is demand infinitely elastic?

c.

At what price is the price elasticity of demand equal to one?

7. Midcontinent Plastics makes 80 fiberglass truck hoods per day for large truck
manufacturers. Each hood sells for $500.00. Midcontinent sells all of its product to the
large truck manufacturers. If the own price elasticity of demand for hoods is -0.4 and the
price elasticity of supply is 1.5. Compute the supply and demand for truck hoods.