Economics 301: Microeconomic Theory and Policy

Joshua Greenstein
Spring 2022

Problem Set 1
Due: Monday, February 7
Instructions:
Groups should hand in a typed, stapled, problem set with the names of all members of group on first page.
Graphs can be drawn by hand and should also be stapled to rest of problem set. Hand in the essay
individually on Canvas.

1) Refer to the supplemental reading “The Rich Get Hungrier” by Amartya Sen, which describes
several factors that Sen saw as affecting global food prices at the time of publication. For each
factor cited by Sen as affecting food prices, identify whether it would be illustrated as a shift in
the supply curve or demand curve, or a movement along the supply or demand curve, and in
which direction.

2) The ride-sharing company Uber’s pricing practices created some controversy in the early years of
the company’s operation in New York City, described here:

“Over the weekend, it snowed in New York, and a lot of New Yorkers tried to take Uber cars home
from their night activities. Those New Yorkers got upset when the Uber cars cost seven or eight
times as much as normal, because of the company's dynamic "surge pricing" scheme, whereby it
gets more drivers to come out on the road during busy times by making rides much more
expensive.”
-Kevin Roose, “Here’s How Uber Should Fix Its Surge Pricing Problem” New York Magazine
December 2013

Uber’s CEO explained the practice like so:

“To understand the economics of surge pricing from Uber’s point of view, think of drivers as
supply and riders as demand. Especially in bad weather, demand goes up: Would-be passengers
don’t want to be out in the snow and rain. Meanwhile, supply goes down: Drivers don’t want to
be out in the snow and rain, either. In that scenario, higher prices are meant to accomplish two
things. ”
“First, by offering drivers more money, it gives them more incentive to get out on the streets —
at least in theory — thereby increasing supply. Second, higher fares price out some riders, and
demand goes down. Calibrating supply, demand, and price to get the most people the most rides
for the least money is the math problem that Kalanick says Uber is always trying to solve.”
- “Uber Boss Says Surging Prices Rescue People From the Snow” Marcus Wholsen, WIRED
magazine, December 2013.

a) Draw a graph showing supply, demand, and market equilibrium for Uber rides before the
snowstorm. Label all axes and curves. (You can make up numbers or do these graphs without
numbers). Next illustrate, using graphs, the following portions of Uber’s story.
 Economics 301: Microeconomic Theory and Policy
Joshua Greenstein
Spring 2022

Problem Set 1
Due: Monday, February 7
Instructions:
Groups should hand in a typed, stapled, problem set with the names of all members of group on first page.
Graphs can be drawn by hand and should also be stapled to rest of problem set. Hand in the essay
individually on Canvas.

b) The snow storm hits. Drivers do not want to be out driving. Illustrate which curve will change
and how. From previous position of equilibrium, what will happen to price of rides and
amount of rides taken? Explain and label which parts of the change are movements along a
curve, and which parts are shifts of a curve.

c) Also due to the storm, more people want to take uber rides. Illustrate which curve will change
and how. From previous position in part b, what will happen to price of rides and amount of
rides taken? Explain and label which parts of the change are movements along a curve, and
which parts are shifts of a curve.

d) Now suppose that prices are not allowed to rise through Uber’s policy. The same effects on
supply and demand, described in parts b and c, still occur. Illustrate the result on the graph.
What is this situation called?

3) Suppose you have a demand function for a particular product of:

1
𝑄𝑄 = 150 − 𝑝𝑝 + 10𝑌𝑌
2

Current price for the commodity is $20. The amount sold is 40 units.

What is the elasticity of demand for this product? Show your steps.
 Economics 301: Microeconomic Theory and Policy
Joshua Greenstein
Spring 2022

Problem Set 1
Due: Monday, February 7
Instructions:
Groups should hand in a typed, stapled, problem set with the names of all members of group on first page.
Graphs can be drawn by hand and should also be stapled to rest of problem set. Hand in the essay
individually on Canvas.

4) There has been recent national debate about substantial increases in the minimum wage. Some
state governments have initiated such increases, and there is a push to do the same at the federal
level. Critics argue that these increases will lead to increased unemployment and harm small
businesses. The following hypothetical illustrates what the model studied in our textbook says
about the effects of such policies:

The demand for fast food workers in the state of New York can be represented by the following
function:
𝐷𝐷(𝑤𝑤) = 200,000 − 5,000𝑤𝑤

Where “w” is the hourly wage for such workers.

The supply of fast food workers in the state of New York can be represented by the following
function:

𝑆𝑆(𝑤𝑤) = 100,000 + 5,000𝑤𝑤

a) At the market equilibrium, how many people in New York work in the fast food industry,
and how much do they make per hour?

b) The state passes a law that workers must be paid a minimum of $15 per hour. How many
workers wish to work in the fast food industry? How many workers do employers in the
industry wish to hire? What is the term for such a situation?

c) Draw a graph illustrating this situation, label axes, supply and demand curve, equilibrium
wage and employment, minimum wage, and current employment situation.

d) Do you think this story is a convincing description of what would happen in the “real
world?” Why or why not? Can you think of any factors left out of this model which might
also affect the employment situation? [The supplemental readings by Smith and Hartnett
may be helpful for this answer].
 Economics 301: Microeconomic Theory and Policy
Joshua Greenstein
Spring 2022

Problem Set 1
Due: Monday, February 7
Instructions:
Groups should hand in a typed, stapled, problem set with the names of all members of group on first page.
Graphs can be drawn by hand and should also be stapled to rest of problem set. Hand in the essay
individually on Canvas.

5) A student has a budget of $200 per week for their meals outside of the home. One possibility is
purchasing a meal at a restaurant, which we will call x1, and which costs $20, and a second
possibility is purchasing a meal at the school cafeteria, x2, which costs $10.

a. Draw a graph depicting the budget set for this choice. Label the axes, the two intercepts
of the budget line, and the slope of the budget line.

b. The student’s utility is represented by the equation:

𝑈𝑈(𝑥𝑥1 , 𝑥𝑥2 ) = 5𝑥𝑥1 𝑥𝑥2

How many meals of each type will she eat?

c. What is utility, and why do we use utility in microeconomic analysis?

6) Suppose the utility that an individual derives from the consumption of two goods can be
expressed using the following function:
𝑈𝑈 = 𝑥𝑥1𝑎𝑎 𝑥𝑥2𝑏𝑏

Using the Lagrangian method, find expressions for the utility maximizing values of x1 and x2 in
terms of income, represented by m, and the prices of goods 1 and 2, represented by p1 and
p2, respectively. Show your steps.

Essay Section (Not Group work, 1-2 paragraphs only).

Consider the two supplemental readings, “Profits vs. Love.” by Russ Roberts, and “The Rich Get Hungrier”
by Amartya Sen. Both tell real-world stories about changes in demand increasing prices. However, in one
of the essays the equilibrium resulting from that changed price is portrayed more positively than the
other. Explain how you think both authors’ stories are similar, and how they are different.