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The Problem Set is due in 6 hours. Total of 3 Questions

1. Decide whether each of the following statements is True, False, or Uncertain, and give a brief but clear explanation why.

a. Due to particularly warm summer in Massachusetts, demand for air conditioners has increased for any given price. The upward-sloping supply curve has stayed unchanged.

Producer surplus will increase.

b. The long-run supply of rental apartments is upward sloping. A rent control policy that lowers rents below the free-market level will result in deadweight loss in the long run.

2. An econometric analysis of gasoline price data provided the following demand estimates, where log represents the natural logarithm:

Short run: log Qgasoline = 5 – 0.08 log Pgasoline

Long run: log Qgasoline = 5 – 0.6 log Pgasoline

a. -0.08 is the short-run price elasticity of demand for gasoline. What does this mean in words?

b. Does it make sense that the long-run elasticity is different from the short-run elasticity?

c. What does this imply for the volatility of gasoline prices in the short-run vs. the long run in response to oil price shocks?

3. In the competitive market for gasoline in Newton, supply and demand are given by:

Qd = 4 – (1/3)*P

Qs = -1 + P

where Q is the number of thousands of gallons per day, and P is the price per gallon in dollars

a) Calculate the consumer surplus and producer surplus at the equilibrium.

b) Now, suppose that the government subsidizes gasoline by paying retailers \$1.00 for each gallon sold.

What will be the new equilibrium price paid by consumers and quantity bought?

Calculate the deadweight loss, if any.