Economics 100A Daniel McFadden Fall 2001 InstructorMicroeconomic AnalysisPROBLEM SET 1Due at your first discussion section meeting the week of September 3rd1. Suppose that we have 8 people who want to rent an apartment. Their reservation pricesare given below. (To keep the numbers small, think of these numbers as being dailypayments.)Person = A B C D E F G HPrice = 40 25 30 35 10 18 15 5(a) Plot the market demand curve. (Hint: When the market price is equal to someconsume I’s reservation price, there will be two different quantities of apartmentsdemanded, since consumer I will be indifferent between having or not having theapartment.) (b) Suppose that the supply of apartments is fixed at 5 units. In this case there is a wholerange of prices that will be equilibrium prices. What is the highest price that wouldmake the demand for apartments equal to 5? (c) What is the lowest price that would make the demand for apartments equal to 5? (d) With a supply of 4 apartments, which of the people A-H end up getting the apartment?Explain. (e) What if the supply of apartments increase to 6 units. What is the range of equilibriumprices?2. In 1999, after nearly 20 years of rent control in Berkeley, the elimination of the law ledto an estimated rise in rents of 40%. Using supply-and-demand diagrams, illustratehow the law and then its elimination affected the rental housing market. Discuss theeffects on the equilibrium rental price and the quantity of housing rented.3. The New York Times reported in 1997 that a crackdown on a cocaine-smuggling ringcaused cocaine prices in Manhattan to rise from $20,000 to $30,000 a kilogram.Illustrate in a supply-and-demand diagram why this happens and explain in words.4. Three years ago you bought what was then a state-of -the-art computer for $3,000.Today, you are deciding whether to buy a new computer that costs $2,500. If you buyit, you can sell the old computer for $600 to your gullible cousin. The old computer’sfuture service is worth $2,000 to you. The new computer’s future service is worth$3,000 to you. Should you buy the new computer? Explain.5. It has cost $16 billion for the government of Cimonoce to build a canal. If opened, itwill generate $400,000 a year in benefits but at an annual cost of $500,000. Should itbe opened? Wouldn’t keeping it closed cause the $16 billion to be wasted? Explain.6. Acme Inc. sells it output at the market price of $8 a unit. Each plant has the costsshown it table belowUnits of Output Total Cost($)0 81 102 143 204 285 38Each plant wants to maximize profits. Calculate the amount of profits for each unit ofoutput produced. How much output should each plant
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