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Problem Set 2 Answers Part 2: answers to odd numbered text problems 1. (a) (b) S1 P S2 $55 $42 D 0 Q 100-pound barrels of cranberries (c) (d) P P2 S P1 0 Q s D Q Qd Bread Q Answers Chapter 4 The answers to even numbered exercises appear in the back of your textbook. Chapter 4 3. P S P* Px 0 Ticket price D Excess demand Q The diagram shows that some people are willing to pay a very high price (even higher than P*) for the tickets. Some nonprice rationing system was used to allocate the tickets to people willing to pay as little as Px . What a scalper does is pay those near Px more than they paid for the tickets and then sells the tickets to someone nearer or even above P*. Since both the buyers and sellers engage in the trade voluntarily, both are better off and the exchange is efficient. #5 Disagree. This statement implies that the demand for apartments increased due to an increase in price, which would be a violation of the law of demand. Demand increased due to increases in income and population growth. This increase in demand caused the price of an apartment (rent) to increase. In general, an increase in demand (demand curve shifts right) causes an increase in price. But an increase in price causes a decrease in quantity demanded (movement along the demand curve). 7. (a) (b) W unemployment = excess supply — S W D 0 LD LS L 9. (a) Using demand and supply data for the United States only, equilibrium price is $36 and equilibrium quantity is 12 million barrels. (b) With a price ceiling of $34, quantity demanded equals 13 million barrels, while quantity supplied equals 10 million barrels. There is an excess demand of 3 million barrels. (c) Quantity supplied will determine the quantity purchased. In a market system, no one can be forced to buy or sell more than he or she wants to. Under conditions of excess demand, suppliers will supply only as much as they want, and some consumer demand will go unsatisfied. # 11. a) Between points A and B, ED = 66.67%/-18.18% = -3.6667 (elastic) Between points C and D, ED = 28..57%/-28.57% = -1 (unitary elastic) Between points E and F, ED = 18.18%/-66.67% = -0.273 (inelastic) This example shows how elasticity varies along a linear demand curve. b) When P = $50, Qd = 200 TR = 10,000. If Price increases to $60 TR falls to 60x100 = $6,000. This is always true of elastic demand: if price increases, TR will fall because there is a relatively large drop in quantity demanded (quantity force is stronger). When P = $30, Qd = 400 TR = 12,000. If Price increases to $40 TR doesn’t change because $40x300 = $12,000. This is always true of unitary elastic demand: if price increases, TR will not change because the corresponding drop in quantity demanded completely offsets the increase in price (price force and quantity force are equal). When P = $10, Qd = 600 TR = $6,000. If Price increases to $20 TR increases change because $20x500 = $10,000. This is always true of inelastic demand: if price increases, TR will increase because the corresponding drop in quantity demanded is less than the increase in price (price force is stronger). c) see discuss in b) # 13. Use the mid-point formula to calculate the %Q and the %P a) Ed = %Q/ %P = +28.6%/-50.0% = -0.57 b) Ed = %Q/ %P = -15.4%/+23.7% = -0.65 c) Ed = %Q/ %P = +66.7%/-97.2% = -0.69 d) Ed = %Q/ %P = -28.6%/+28.6% = -1.0 # 15. a) no, demand is elastic (-1.2, meaning a 10% increase in prices will cause a 12% decrease in quantity demanded). If they raise prices, total revenue will fall because the quantity force is stronger than the price force. b) no, demand is inelastic (-0.5, meaning a 20% decrease in price causes only a 10% increase in quantity demanded). If they cut prices, total revenue will fall because the price force is stronger than the price force.