Principles of Microeconomics, Assignment 1

Question 1
Suppose the demand curve for a particular product is given by
Q = 20 − 5P + PS
where P is the price of the product and PS is the price of a substitute good. Let
PS = $3.00
1. Suppose P = $1.00. What is the price elasticity of demand? What is the crossprice
elasticity of demand? 2. Suppose the price of the good, P, goes to $2.00. Now what is the price elasticity
of demand? What is the cross-price elasticity of demand?
Question 2
Modification of Example 2.9. Consider the setting of example 2.9 with the following
observed price and quantities: • 2015-2016 world price = $50 per barrel • World demand and total supply = 23 billion barrels per year (bb/yr) • OPEC supply = 8 bb/yr
• Competitive (non-OPEC) supply = 15 bb/yr
Short-run and long-run elasticities are as follows:
Short Run Long Run
World Demand: -0.1 -0.5
Competitive Supply: 0.1 0.5 a. Find the short-run demand and competitive supply curves.
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