MBA 731, Problem Set #1
Due Date: After chapter 4 has been covered.
1. Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year.
a. Derive the (linear) long-run demand and supply equations.
b. Suppose the long-run supply curve you derived above consists of competitive supply plus the quantity ...view middle of the document...
78 + 0.29p,
What must be OPECʹs level of production in this long-run equilibrium to maintain the price of $30?
2. Sweet Corn is a product of the Small Farmers Association. Producers in the area are able to switch back and forth between Corn and wheat production depending on market conditions. Similarly, consumers tend to regard Corn and wheat (bread and corn products) as substitutes. As a result, the demand and supply of Sweet Corn are highly sensitive to changes in both Corn and wheat prices.
Demand and supply functions for Sweet Corns are as follows:
QD = -1,450 - 25P + 12.5PW + 0.1Y
QS = -100 + 75P - 25PW - 12.5PL + 10R
where P is the average wholesale price of Sweet Corn ($ per bushel), PW is the average wholesale price of wheat ($ per bushel), Y is income (GDP in $ billions), PL is the average price of unskilled labor ($ per hour), and R is the average annual rainfall (in inches). Both QD and QS are in millions of bushels of Corns.
a. When quantity is expressed as a function of price, what are the Sweet Corn demand and supply curves if PW = $4, Y = $7,500 billion, PL = $8, and R = 20 inches?
b. Calculate the surplus or shortage of Sweet Corns when P = $1.50, $2, and $2.50.
c. Calculate the market equilibrium price, output combination.
3. Given Qd = 150 – 10P, find Q and P at which TR is maximized. Find P and Q at which: Ed >1, P and Ed