Student Number:

QUIZ 1
Section B

Question 1. [4.5 marks] Consider the following sequence of events in the market for
gasoline in Cedar Falls, Iowa during the years 1999-2000.
1999: The year was uneventful. The price of one gallon of gasoline was $1.25 and 17.5
million gallons were sold.
2000: There was a shortage of oil from the Middle East. As a result, the price of gasoline
rose to $1.75 and only 12.5 million gallons were sold.
2001: The shortage of oil from the Middle East ended. Low consumer incomes,
however, caused many consumers to cancel their vacations. As a result, the price of
gasoline fell to $1.00 and only 17.0 million gallons were sold.
Find linear demand and supply curves that are consistent with this information.
Answer:
The event in 2000 shifted the supply curve for gasoline. This will identify the demand
curve. Setting Q d a bP and plugging in the 1999 data implies 17.5 a 1.25b ; using
the 2000 data implies 12.5 a 1.75b . Solving these two equations in two unknowns
yields a 30 and b 10 . Thus, the demand curve is Q d 30 10 P .
The event in 2001 shifted the demand curve for gasoline. This will identify the supply
curve. Setting Q s c dP and plugging in the 1999 data implies 17.5 c 1.25d ; using
the 2001 data implies 17 c d . Solving these two equations in two unknowns yields
c 15 and d 2 . Thus, the supply curve is Q s 15 2 P .

Question 2. [6 marks] For each of the following cases write a utility function describing
the preferences and draw and label an indifference curve.
a) [1.5 marks] Sally likes peanut butter (P) and Jelly (J) but only wants 2 ounces of P
for 3 ounces of Jelly.
Answer:

U ( P, J ) min 2 J ,3P

The indifference curves are L-shaped with the corner of the indifference curves lying on a
straight line that has slope equal to 3/2 when P is on the x-axis and J on the Y-axis.

b) [1.5 marks] Sally likes peanut butter (P) but neither likes nor dislikes Jelly (J).
Answer:
U ( P) P

In a graph with P on the x-axis and J on the Y-axis, the indifference curves are
represented by vertical lines.

c) [1.5 marks] Sally likes both peanut butter and Jelly, and always gets the same
additional satisfaction from an ounce of peanut butter as she does from three ounces of
Jelly.
Answer:

U ( P, J ) 3P J

In a graph with P on the x-axis and J on the Y-axis, an indifference curve for a Utility
level of three, for above written utility function, is given by the graph of the following
equation
J 3 3P