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ECN 101
Fall 2007
PROBLEM SET 3
1.
At an Urban College where most students come to school by their cars, there are 8000 parking spaces.
Suppose that the price of parking spaces is determined by market forces. Currently the demand and
supply curves for parking spaces are given by the following equations:
Qd= 12000-500P
Qs=8000
a) Draw on a graph demand and supply curves. What is unusual about this supply curve? Why might
this be true?
b) Compute the equilibrium price and quantity algebraically and show these on your graph.
c) This college plans to increase total enrollment next year, and as a result the demand for parking
spaces will double (which means that the students demand twice as many spaces as before.) At the
same time there will be additional 200 new parking spaces. Write down the equations for new
demand and supply curves. Illustrate these graphically on an seperate graph.
d) Calculate the new equilibrium price and quantity. Show it on your graph.
2. In country Mercury there is very unequal distribution of income, such that the majority receives very low
incomes (low income group). A small minority receives very high incomes (high income group). Dental
health services are provided on the free market. The table below gives the demand schedules of both groups
separetely. There are also three private companies supplying dental health services. Their total supply
schedule is also given below.
Price/unit
($)
80
60
40
20
Quantity demanded
(low income group)
0
0
10
20
Quantity supplied
(high income group)
15
25
35
40
Total Qd
Total Qs
35
25
20
10
a)
According to the above schedule when the unit price is $80, low income group does not demand dental
health care, while at the same price high income group demands 15 units. How can you explain this?
Doesn’t the low income group care about their family^s dental health?
b) Find the total quantity demanded on the above table. Then illustrate graphically total market demand
and supply curves in order to draw the market for dental services in Mercury.
c) In market equilibrium how many units of dental services would be sold at what price? Show P eq and Qeq
on your graph.
d) Who is able to buy dental services in Mercury at the market price? Are both groups able to receive
dental health? Explain.
e) Do you think the above outcome of the dental service market is acceptable? Why or why not? Suggest
one policy which the government may pursue in order to correct this outcome. Show its effect on your
graph.
3. a) Illustrate the imposition of a tax imposed on suppliers of apples. Show the effect on the apple market.
Indicate the full price paid by consumers, net price received by suppliers and the new equilibrium price
of apples.
b) Redo part (a) by assuming that the tax is put on consumers instead of producers. show the effet on
the apple market. Indicate the full price paid by consumers, net price receivedby suppliers and the new
equilibrium price of apples.
4. a.) If there is a 5% increase in the price of ice cream which causes a 35% decrease in the quantity of ice
cream demanded, what is the price elasticity of demand for ice cream) Is the demand for ice cream
elastic or inelastic?
b.) If the price elasticity of supply of carrots is 3 and there is a 15% decrease in the quantity of carrots
supplied, what must be the percentage change in the price of carrots that caused the decrease in quantity
supplied of carrots?
c) Suppose that the supply of bricks is perfectly elastic. How does an increase in the demand for bricks
affect the equlibrium price and quantity of bricks?
d) Suppose that the price elasticity of demand for mobile phones is 2 in absolute value and the price of
mobile phones increases by 10 %. How much do expenditures on mobile phones increase (decrease)
by?
e) Suppose that a perfume company wants to increase its revenue by increasing the price of its product.
If the price elasticity of demand for its product is 0.5 in absolute value, is increasing the price of
perfume a good idea or not? Explain your answer.
f) Which is likely to have a higher price elasticity of demand? Explain why. i) Icecream or chocolate
cream ii) Toothpaste or Ipana toothpaste.
5. Table1. Cross Price and Own Price Elasticities of Demand in Mythuania
% change in quantity
demanded of:
Food
Wine
Beer
Food
-0.25
-0.13
0.07
In response to a 1 % change in
Wine
0.06
-1.20
0.41
Beer
0.01
0.27
-0.85
Answer the following questions using the estimated elasticities presented in Table 1.
a)
Comment on the own price demand elasticities of the three goods, identifying for which goods demand
is elastic and for which it is inelastic.
b) What is the effect of a change in the price of food on the consumption of wine and beer? What does this
suggests about the relationship between food and other commodities? What happens if the price of food
increases by 10 %?
6. Table 2 represnts the quantity of rice popsicles demanded at various prices:
Price per packet
(YTL)
2.10
1.80
1.50
1.20
0.90
0.60
0.30
Quantity demanded
(Thousands)
10
20
30
40
50
60
70
Total expenditure
(YTL thousands)
Price elasticity of demand
a) Draw the demand curve
b) Suppose price were 1.20 YTL. What would be the change in quantity demanded if price were to be
reduced by 30 kuruş? Would your answer be different if you started at any other price?
c) Calculate total spending on rice popsicles at each price shown.
d) Calculate the price elasticty of demand for rice popsicles between 60 kuruş and 2.10 YTL.
e) Draw a graph showing total revenue against sales. plot revenue on the vertical axis and quantity
demanded on the horizontal.
f) At what price is revenue at its greatest?
g) At what price is the demand elasticity equal to -1?
h) Within what ranges of prices is demand elastic, inelastic?