Microeconomics II

Spring 2023 Crystal Wong

Problem Set 3
(Due 22 March Wednesday 8:00 pm)

For each problem set you turn in, you will get no score if you only answer multiple choice
questions, or copy from the answer keys of my previous classes.

Short Questions

1) Consider a market where the quantity supplied 𝑄𝑠 is a function of price 𝑃 alone, and the
quantity demand function 𝑄𝑑 on the other hand, is a function of income Y. The model is
written as:

𝑄𝑑 = 𝑄𝑆 (1)
𝜕𝐷 𝜕𝐷
𝑄𝑑 = 𝐷(𝑃, 𝑌) (2) ( 𝜕𝑃 < 0 , 𝜕𝑌 > 0)
𝜕𝑆
𝑄𝑆 = 𝑆(𝑃) (3) ( 𝜕𝑃 > 0)

Work out the comparative statics of how the equilibrium price would change in response to an
exogenous increase in 𝑌.

2) The California cigarette market consists of the following supply and demand curves:
QD = 150 - 20p
QS = 40p
where Q is the number of packs of cigarettes per year (in millions!), and p is the price per pack.

a. Compute the market equilibrium price and quantity.

b. California imposes a tax on cigarettes of $0.90 per pack. Suppliers pay this tax to the
government. Compute the after-tax price and quantity. How much do suppliers receive net of tax
(per pack)?

3) Suppose that the supply and demand of wheat depend on the price of wheat (p), the amount of
annual rainfall (r), and the level of disposable consumer income (I). The equations describing the
supply and demand curves are given by:

QS = 20r + 100p
QD = 4000 - 100p + 10I

Using the supply and demand equations for wheat, solve for the equilibrium price and quantity as
functions of I and r. How do the equilibrium price and quantity change with an increase in
income(I). Answer this comparative statics question using calculus.

1
Multiple Choice Questions

1. The supply and demand for wheat is given by QS = 200 + .2A + p and QD = 500 - p, where p
is the price of wheat and A is the amount of rainfall (inches per year). The effect of an
incremental increase in rainfall on equilibrium will be
A) a decrease the price of wheat by 10¢.
B) a decrease the price of wheat by 20¢.
C) an increase in the price of wheat by 20¢.
D) an increase in the price of wheat by 10¢.

2. If the demand for oranges is written as Q = 100 - 5p, then the inverse demand function is
A) Q = 5p - 100.
B) Q = 20 - .2p.
C) p = 20 - 5Q.
D) p = 20 - .2Q.

3. Suppose the demand curve is perfectly inelastic and the supply curve is upward sloping. The
price sellers receive after a specific tax is imposed on sellers
A) is less than before the tax.
B) is higher than before the tax.
C) is unchanged.
D) depends on the supply elasticity.

4. The inverse demand function for cases of whiskey defined by p = 160 - 6q, and the inverse
supply function is defined by p = 61 + 3q. Originally there was no tax on whiskey. Then the
government began to tax suppliers of whiskey $27 for every case they sold. How much did the
price paid by consumers rise when the new equilibrium was reached?

A) It rose by $27.
B) It rose by $29.
C) It rose by $18.
D) It rose by $16.