Applied Microeconomics, Economics, Microeconomics

EDPE 4056: Applied Microeconomics Program in Economics and Education
Teachers College, Columbia University Prof. Francisco Rivera-Batiz

Problem Set 1

Please answer all of the following questions. Explain your answers clearly, showing how the results are obtained.

1. Assume that the market for wheat is perfectly competitive. Suppose the demand curve for wheat is given by:

QD = 200 – 2P

where QD is the quantity demanded, in bushels, and P is the price, in dollars per bushel. Suppose that the supply curve is given by:

QS = P – 10,

for values of P greater than or equal to 10, where QS is the quantity supplied, and QS = 0 when P < 0.

(1) Find the equilibrium price and quantity of wheat. Draw them in a clearly marked diagram.

(2) Suppose that unfavorable weather conditions shift the supply curve to the left, by 5 bushes of wheat at each price. Again find the equilibrium price and quantity, and draw the new equilibrium on the diagram you constructed for part (1).
(3) Going back to the demand and supply curves in part (1), assume now that a liberal government in the country decides the price of wheat is too expensive and decides to fix the price of wheat at P = 50 dollars per bushel. No one can sell or buy wheat except at this fixed price. What impact will this have on the market? How much wheat will be sold? How much will be demanded by consumers? Is this a good policy? Why?

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