Evans School of Public AffairsProf. R. Plotnick

PBAF 516A, Fall 2007

Problem Set 1

Supply and Demand, Elasticity, Basic Consumer Theory

1. Using a supply and demand graph for coffee beans, explain how the following would affect the supply and demand for coffee beans, the quantity of beans sold, and the price of beans:

  1. Health researchers announce evidence that drinking coffee lowers the risk of cancer.
  2. Excellent weather causes the tea harvest to increase by 20% above its usual level.
  3. The price of fuel rises, affecting the cost of shipping beans to roasters and then to stores.
  4. The global economy expands and consumers' incomes rise (assume beans are a normal good).
  5. Vietnam, which has become a major coffee grower, expands coffee production by 10%

2. Assume that the demand curve for apples is:P=100-Qd
and the supply curve is P=4Qs

  1. Graph the above functions, indicating the horizontal and vertical intercepts.
  2. Solve for the equilibrium price and quantity in this market.
  3. Show the amount of consumer surplus.
  4. If the government implements a price floor of 90, how big will the resulting surplus be?
  5. Show the change in consumer surplus after the price floor is imposed.

3. In the U.S. it is illegal to buy or sell heroin, yet there is still a market. Suppose the government’s main goal is to decrease the amount of heroin consumed. For each of three proposed solutions, show what would happen to the market price and quantity for heroin. Briefly discuss your policy recommendation for the government by citing the costs/benefits of each. (For simplicity, assume that heroin sellers and heroin buyers are two separate groups of people)

  1. Offer extensive drug rehabilitation programs free-of-charge to heroin users
  2. Increase the minimum length of prison sentences for heroin sellers
  3. Legalize the sale of heroin

4. At a price of $1.50, BART (Bay Area Rapid Transit) carries 75,000 people into San Francisco, while 90,000 ride the bus, and 60,000 cross the Bay Bridge in cars. When the fare went to $2.00, BART ridership fell to 60,000, bus ridership rose to 96,000, and 69,000 cars crossed the bridge. Calculate arc elasticity for each of the following.

a.The price elasticity for BART?

b.The cross price elasticity of bus service with respect to BART fare?

c.The cross price elasticity of car trips?

5. It is well known that Jack and Jill have different preferences for beef and chicken. Yet when surveyed at a local supermarket, they were found to have the same marginal rate of substitution of beef for chicken. What does this mean? Reconcile these two observations.

Browning and Zupan problems: 1.4, 1.12, 2.17, and 3.24