Download 4 - Cal Poly Pomona

EC 201
Cal Poly Pomona
Spring, 2007
Dr. Bresnock
Student Name:
Class Meeting Time:
Homework Assignment 4 Answers (25 points)
Complete each statement or answer the question in the spaces provided.
(1)
The price elasticity of demand for a new car model called Sputter is estimated to be
equal to -.40. This means that a 1% increase in Sputter's price will result in a
%
.40 decrease (increase/decrease) in the number of Sputters demanded.
Demand is therefore inelastic (elastic/unit elastic/inelastic). If the manufacturer
wishes to raise total sales revenue from its Sputter model, it should raise
(raise/lower) the price of the car.
(2)
The quantity of Good A increases by 10% when Good B's price increases by 15%.
The cross-price elasticity of demand is .66 . These two goods must therefore be
substitutes
(substitutes/complements/independent). Give an example of two
goods of this type:
the two goods are alternatives – consumer is indifferent
between them, i.e. butter and margarine, Fiji and Aquafina water, etc.
(3)
When Maria's income falls from $50,000 to $30,000, she increases purchases of
Good A from 50 units a year to 100 units a year. The income elasticity of demand is
therefore equal to
-1.33 .
For Maria, Good A is inferior
(normal/neutral/inferior) because:
Maria buys more of Good A as her income
decreases and vice versa
(4)
If the price is $50, 20 units are sold while at a price of $40, 25 units are sold, then the
elasticity of demand for this good is -1.00 or unit elastic (elastic/unit
elastic
/inelastic) and a decrease in price will result in no change (increase/no
change/decrease) in total revenue
(5)
Consider the two goods – water and diamonds. Indicate what the likely elasticity
case will be: elastic/greater than 1 ( |EP>1| ); unit elastic/equal to 1 ( |EP=1| ),
inelastic/less than 1 ( |EP<1| ), or zero ( |EP=0| ):
(a)
(b)
(c)
(d)
(e)
(f)
Price elasticity of demand for water:
<1 or inelastic
Price elasticity of demand for diamonds: >1 or elastic
Income elasticity of demand for water:
0
Income elasticity of demand for diamonds: >1 or elastic
Cross price elasticity of demand between water and diamonds:
0
Diamonds are most likely to be considered
normal
(normal/neutral/
inferior) goods; water is most likely to be considered neutral
(normal/ neutral/inferior); and water and diamonds would be unrelated
(substitutes/complements/unrelated) goods
Now consider the market for pizza. Suppose that the market demand for pizza is given by the
equation P = 40 – 4QD, and the market supply for pizza is given by the equation P = 10 + 2QS, where
QD = quantity demanded, QS = quantity supplied, P = price consumers pay (per pizza) and the price
producers receive (per pizza).
(1)
Graph the supply and demand schedules for pizza and indicate the equilibrium price and
quantity. (Your answer must contain your complete algebraic solution). Calculate the
consumer surplus and producer surplus and identify these areas in the graph below.(Be sure to
label the axes and functions, and number your intercepts.)
P
40
S
CS
PE = $20
PS
10
0
D
QE = 5
10
Equilibrium Price:
Q
$20
Equilibrium Quantity:
5
(Show your complete algebraic solution for the equilibrium price and quantity in the
space below.)
In Equilibrium:
S=D
40 – 4Q = 10 + 2Q
30 = 6Q
5 = QE
PE = 40 – 4 (5) = $20 for demand
and
PE = 10 + 2 (5) = $20 for supply
Consumer Surplus at Equilibrium:
$50
(Show all work.)
$25
(Show all work.)
CS = ½ (20 x 5) = $50
Producer Surplus at Equilibrium:
PS = ½ (10 X 5) = $25
2