Download Lab Four

Economics 201
Lab Practice Problems #4
Elasticity/Government Policies
1. Elasticity (use the mid-point formula)
Consider the market for corn (in millions of bushels), with the following
demand and supply schedules (per week):
Price ($)
6.00
5.50
5.00
4.50
4.00
3.50
3.00
Quantity Demanded
120
140
160
180
200
220
240
Quantity Supplied
300
260
220
180
140
100
60
a) Graph the demand and supply curves
b) What is the equilibrium price and quantity?
c) Calculate the price elasticity of demand as the price of a bushel rises
from $3.50 to $4.50. Is demand elastic, inelastic or unit elastic?
d) Calculate the price elasticity of demand as the price of a bushel falls
from $5.50 to $4.50. Is demand elastic, inelastic or unit elastic?
e) Calculate the price elasticity of supply as the price of a bushel rises
from $3.00 to $4.00. Is supply elastic, inelastic or unit elastic?
f) Calculate the price elasticity of supply as the price of a bushel falls
from $6.00 to $5.00. Is supply elastic, inelastic or unit elastic?
2. Application of Elasticity (use the original formula, NOT the midpoint)
Suppose you work for the university bookstore. The current price of a UT
tee shirt is $15, and the bookstore normally sells 200 per week. The elasticity of
demand, based upon prior research, is estimated to be 0.75. In an attempt to
raise revenue, the bookstore is considering raising the price to $16.5 (a rise of
10%).
a) Can you estimate what will happen to quantity demanded?
b) Can you estimate what will happen to revenue? Will it rise or fall? By
how much?
3. Price Controls
Use the same demand and supply schedules as above to answer the
following:
a) Suppose that United Farmers of America, a powerful lobby group, puts
pressure on Congress to set a minimum price of $5.50 per bushel. Is
this a price ceiling or price floor? Would this cause a surplus or
shortage of corn? By how many bushels?
b) Suppose that Congress feels that the price of corn is too high, and in
order to help consumers, imposes a maximum price of $4.00 per
bushel. Is this a price ceiling or price floor? Would this cause a
surplus or shortage of corn? By how many bushels?
4. Tax Incidence
How is the tax burden shared when a tax is placed on a good with an
elastic demand and an inelastic supply? Graph it!
How is the tax burden shared when a tax is placed on a good with an
inelastic demand and an elastic supply? Graph it!
What general conclusions can we make about which side of the market
bears the most of a tax burden?