Washington University Department ofEconomics

Economics 103B
Introduction to Political Economy: Microeconomics
Spring 2005

Problem Set 4

1) Consider a demand curve given by the following equation: Q = 200 - 2P, where P is the price of the good. Calculate the elasticity of demand at each of the following prices: $90, $50, and $10. In making your calculations, let price vary by $1 (e.g. compute the elasticity for the pair of prices $90 and $91).

2) In 1979, the revolution in Iran caused a reduction (leftward shift) in the supply of oil flowing to the United States. It is estimated that the reduction in the quantity of oil available was approximately 4 percent of our total supply. For parts (a) and (b) assume that the national average price of gasoline was $1 per gallon.

(a) If all of the Iranian crude oil had been used to produce gasoline and the elasticity of demand for gasoline was -.2, what would you expect the new equilibrium price to be?

(b) Suppose instead the elasticity of demand was -.5. Now what would be the new equilibrium price?

3) Explain, with the aid of a graph, why crime in St. Louis may actually increase if local narcotics agents are able to reduce the supply of cocaine (or heroin) available to the St. Louis market.