ECO 201

Problem Set 2
1. Consider the following market demand and supply functions, respectively:
P = 100 and P = ! where P is the price of the good and is the amount
demanded and supplied.
"a# $s the market demand price elastic at the e%uili&rium point' (hat is the price
elasticity of supply' )uppose government decides to control the price of the
product at *s +0 &ecause it feels that the free market price is too high. ,iscuss.
"&# $s the market sta&le'
"c# -ow much is the market consumer surplus' -ow much is the market producer
surplus'
.. Consider the following information to estimate the linear demand function.
/%uili&rium price and %uantity are respectively, P = *s !00, 0 = 1000 tons. 1nd price
elasticity of demand is 20.3.
4. Consider the following price demand com&inations &etween two goods and 5:
P "# : . ! in rupees
, "5#: 10 .0 in kilogram

"a# (hat is the cross price elasticity of demand'
"&# 1re the goods complementary or su&stitute'

!. ,uring harvest seasons there is a tendency for agricultural prices to fall. 6overnment
often attempts to arrest such price declines &y procuring the product at a price higher
than the market price, and then releasing the product through its fair price shops at a
lower than e%uili&rium price for the &enefit of the poor consumers. ,iscuss its
conse%uences for market im&alance and government finance.
3. ,espite rising demand for electronic goods, their prices are falling over time. /7plain.
+. Consider the world oil market which has two groups of producers. 8ne is the 8P/C
countries who produce a fi7ed amount per year and the other group consists of
competitive producers. $n the short run, &oth the demand and supply curves are very
inelastic. -owever, in the long run the two functions &ecome more elastic. ,iscuss
the conse%uences for the world oil market in the short run and in the long run when
8P/C suddenly cuts &ack on its output.
9. ,iscuss the market conse%uences of :rent control; and :minimum wage laws;.