Microeconomics and Policy Analysis U8213 Problem Set 1
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Microeconomics and Policy Analysis U8213
Problem Set 1 – Due 09/23/2022 by 11:59pm
Individual portion :
Please write your reflection using the following link on Canvas:
https://courseworks2.columbia.edu/courses/186334/quizzes/184365
Group portion :
Submitted as a groups of 2 to 4 students (from any of the two sections of the course)
. Note that you only have to upload ONE problem set answer per group.
. Make sure you write both first, last names and unis of each group member on the first page ofyour submitted answers.
. Make sure that you scan your answers into one pdffile.
Question 1 (very fast)
Excerpt: We study the dynamics of residential electricity demand …… we estimate that the price elasticity of demand… from −0.09 in the first six months to −0.27 two years later. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy (Tatyana Deryugina, Alexander
MacKay, Julian Reif, American Economic Review, January 2020)
Fill in the blanks.
a) Because the price elasticity of residential electricity demand is estimated to be -.09 in the first six
months, then a 2% increase in the price of electricity will cause the quantity demanded to fall by… … .
b) The excerpt suggests that the residential elasticity of demand over two years is………. than the
residential elasticity of demand over six months.
Question 2 (pretty fast)
Please read the following commentary by Gavin Maguire:
https://www.reuters.com/markets/commodities/europes-gas-price-plunge-churns-up-global-coal-markets- maguire-2023-01-18/
a) Does the commentary suggest that the increase in equilibrium coal prices observed in 2022 in Europe was associated to an increase or a decrease in equilibrium coal quantity? Explain.
b) Does the increase in equilibrium coal prices observed in 2022 in Europe appear to be driven by a shift in demand or in supply? Explain.
c) Does the commentary suggest that natural gas is a substitute or a complement for coal? Explain.
d) What explains, according to the article, the divergence between the European and Asian coal prices?
Briefly explain by referring to different demand factors (no graph is needed).
Question 3 (not fast)
Suppose that in September 2020 the monthly demand and supply for gasoline in the U.S. were given by:
Q
= 13.2 − P and Qௌ = 5P
where Q and P measure, respectively, the quantity of gasoline (in billions of gallons) and the price (in dollars per gallon).
a. Do the equations above indicate that the market of gasoline is affected only by the price of gasoline (so that other variables don’t matter)? Explain.
b. Assuming that the market for gasoline is perfectly competitive, find the equilibrium price and quantity. Illustrate the demand and supply represented by the equations above and the equilibrium on one graph
with Q on the horizontal axis and P on the vertical axis.
In September 2023 the price of gasoline in the U.S. is $3.7 per gallon.
Suppose that the increase in the equilibrium price of gasoline is the result of a contraction in the supply of gasoline due to an increase in the price of oil (an input in the production of gasoline).
It has been estimated that, holding the price of gasoline constant, the increase in the price of oil has caused the monthly supply of gasoline to drop by 6 billion gallons relative to 2020.
c. Does the sentence above suggest that the elasticity of gasoline supply with respect to the price of oil is positive or negative? There is no need to explain.
d. Illustrate the effects of this shock on your graph of part b). Label with letter A the equilibrium in September 2020 and with letter B the equilibrium in September 2023.
e. We just discussed an increase in price that is associated to a drop in the quantity supplied. Is this result consistent or inconsistent with the law of supply? (You answer a similar question in recitation 2.)
f. Assuming that the demand for gasoline is not affected by any exogenous shock, why would the
equilibrium quantity of gasoline fall by less than 6 billion gallons of gasoline per month? Explain your answer without using any equations or graph.
Suppose that the greater availability of electric cars increases the price elasticity of demand of gasoline (at the equilibrium of part b) relative to what we have assumed so far.
g. How does the greater elasticity of the demand for gasoline affect the change in equilibrium price and quantity (due to the contraction in supply) relative to what was discussed above? Clearly explain the intuition of your answer.
2023-09-22