PROBLEM SET 1 Microeconomics: 33001 Booth School of Business Professor Emily Oster 1. Annual demand for US wheat is: Q D = 3600 - 300P. Annual supply of U.S. wheat is: Q S =1800 + 300P. P is the price, in dollars. a. Draw a supply and demand diagram representing this system. b. What is the price for wheat in equilibrium? c. Government sometimes regulates the price of food. Imagine that government introduces a short-term restriction that you cannot sell wheat at more than $2 per unit. What will happen to the market? Illustrate using your supply and demand graph. 2. Use supply and demand curves to illustrate the effects of the following actions on the quantity and price of tea: a. b. c. d. An increase in the price of sugar. An increase in the price of coffee. An increase in income levels. An announcement from scientists that coffee contains very effective antioxidants.

3. Due to the financial crisis, the CTA must raise prices. It raises fares by 40%. After a month, the revenue is 5% greater than the month before the fare increase. a. Without any math, explain intuitively whether the number of riders has increased or decreased. b. Estimate the % change in riders as a result of the fare increase. c. Estimate the price elasticity of demand. d. Assume fare increase is permanent. How would you expect price elasticity of demand to change after several years? Illustrate this graphically using a supply and demand diagram. (HINT: Treat the supply curve as perfectly horizontal, with the CTA simply picking a price and committing to supply as much capacity as needed at that price).

4. TRUE, FALSE or UNCERTAIN (explain your answers): a. The elasticity of demand is the same as the slope of the demand curve. b. The supply of apartments is more inelastic in the short run than in the long run. c. Demand for Dell computers is less elastic than demand for all desktop computers.