Principles of Micro: Problem Set

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Due: 9/

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0/2013

You must show all work to receive full credit. This includes labeling all axes, curves, shifts,

etc.

Question 1 (20 points)

Consider the market for pizza (assumed to be a normal good) that has following supply and demand curves:

Inverse Demand:

P = ↵ + �Qd

Inverse Supply:

P = � + �Qs

where ↵ > 0, � < 0, � > 0 and � > 0

a. Graph the supply and demand curve on the same graph. Label all important points including the

intercepts.

b. Give the analytical expression for equilibrium price (P ⇤) and quantity (Q⇤).

Assume a fifty cent tax is charged to firms on every pizza sold.

a. Write the equation for the new supply curve.

b. Show the effect of this tax using the supply and demand graph.

c. What is the new equilibrium price and quantity? Has the equilibrium price increased as much the tax?

Why or why not?

Now you are given the following Demand and Supply Schedules:

Demand Schedule

Price Qd

$25 0

$20 2

$15 4

$10 6

$5 8

$0 10

Supply Schedule

Price Qs

$30 15

$25 12

$20 9

$15 6

$10 3

$5 0

a. Using the Demand Schedule, find the values of ↵ and �.

b. Using the Supply Schedule, find the values of � and �.

c. What is the equilibrium price and quantity?

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Question 2 (10 points)

Read the article “Landscape with Well” posted on the Moodle page to answer the following questions. Explain

all shifts.

a. Graph the effect of fracking on the market for oil in the U.S.

b. Graph the effect of fracking on the market for SUVs in the U.S.

c. Graph the effect of fracking on the market for hybred cars in the U.S.

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