INTERMEDIATE MICROECONOMICS

ECON 3550.003/5030.001 SPRING 2002

HOMEWORK SET #1

Chapter 1

1.)The US Department of Agriculture is interested in analyzing the market for corn. USDA staff economists estimate the following linear equations for supply and demand:

Qd = 1000 - 100P

Qs = 100 + 200P

where quantity is measured in millions of bushels and price is measured in dollars per bushel.

(a)Graph this market and calculate the equilibrium price and quantity under a free market.

(b)Suppose the government places a $2.00 per bushel price ceiling on corn. How will this change the quantity supplied by firms and the quantity demanded by consumers? Is this a shortage or a surplus? Explain.

(c)What will happen to the price and quantity of corn if supply increases with the price ceiling in place? Explain.

2.)Consider the market for taxi services in Dallas. Use supply and demand curves to analyze the effects of each of the following actions on this market. (Consider each action separately.) Explicitly state the assumptions you make in your analysis.

(a)Bus drivers go on strike.

(b)Bus fares increase.

(c)There is an inexplicable increase in murders by taxi drivers.

(d)Gasoline prices decrease.

(e)The population of Dallas increases.

(f)Taxi cabs are required to be less than five years old.

3.)Page 25: N1, N2, N3, and N4.

4.)Page 28: #14, #15, and #16.

Chapter 3

5.)You always have three beers with every slice of pizza that you eat: no more, no less.

(a) Draw a set of indifference curves that correspond to such preferences.

(b) Your weekly income is $16. Draw your budget constraint assuming the price of pizza is $2 and the price of beer is $2. What is your optimal bundle of pizza and beer?

(c) Repeat part (b) assuming an income of $12 and prices of beer and pizza equal to $1.

6.)In the sleepy town of Krum, Texas, the residents have preferences over milk and cookies. Assume a typical resident of Krum (whom we will call Melvin) has a fixed income of $10 to spend on milk and cookies. The price of a glass of milk is 50 cents and the price of a cookie is 25 cents. The Krum city council has a choice of two potential policies:

i)Give every resident an in-kind subsidy of 5 glasses of milk.

ii) Give every resident a cash subsidy of $2.50.

a) Draw Melvin’s budget constraint under both potential policies. Label all relevant points.

b) Will Melvin care which policy is adopted? Explain your answer in detail.

7.)Page 70: R1, R2, R9, and R10.

8.)Page 72: #9 and #13.

9.)Page 73: #21.