Ec5p022007-1 - Economics 5 D Richards Principles of...

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Economics 5 D. Richards Principles of Microeconomics Fall, 2007 Second Problem Set 1. Assume that the local heating oil industry is competitive. Annual Demand is given by: P = 5 – 0.005 Q . Annual supply is given by: P = 0.95 + 0.0004 Q . Here P is the price per gallon of heating oil and Q is the amount of gallons of heating oil (in millions) annually consumed. Work out the producer surplus (economics profit) earned by local heating oil producers. What will happen to this producer surplus if crude oil prices rise by 27¢ per gallon so that the new supply curve is: P = 1.22 + 0.0004 Q ? That is, will heating oil firms make more or less profit if crude oil prices rise? Producer surplus 1 = [(1.25-.95)(750)]/2 = $112.50 Producer surplus 2 = [(1.5-1.22)(700)]/2 = $98 Oil firms will make less profit if crude oil prices rise. 2. The price of credit, i.e., of obtaining a loan is usually referred to as the interest rate, r . Now consider the following algebraic model. (Here Q is the amount of borrowing measured in billions of dollars and r is the interest rate in percentage terms.) Private Loan Demand: r = 8 - 0.04 Q ; Private Loan Supply: r = 0.06 Q . a. Determine the equilibrium quantity of loans and the equilibrium interest rate. 8-.04Q = .06Q Q = $80 billion r = 8-.04(80) r = 4.8% b. Suppose that, in addition to the private demand, the government runs a deficit that requires that it borrow100 (billion) regardless of the interest rate. Use the information on the government and private demand for loans and the supply of loans to determine the new equilibrium interest rate r and loan quantity Q . What is the actual amount of private borrowing in this equilibrium? 300-25r = 50/3r r = 7.2% , Q = 120 billion 120-100 billion from government borrowing private borrowing = 20 billion 3. As shown below, the population of the village of Rowville consists of 200 residents uniformly distributed at intervals of 25 meters along a stretch of road five kilometers long. At the west end of Rowville, in addition to a resident, there is a pub center in which a large number of pubs compete to serve meals (which include food and beverages).
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