002 ECON Homework 2 _______________________________________________________________________ Read these instructions carefully! Carefully answer each of the questions below. You can write or type your answers for the questions EXCEPT THE GRAPH FOR PART 3D) MUST BE COMPLETED BY HAND (NOT USING THE DRAWING TOOLS IN WORD OR ANY OTHER PROGRAM). Please put your name and PSU ID number at the top of the 1st page. You may use as many sheets of paper as you need. When you are finished, scan your entire document (including the parts you typed and the parts done by hand). Save the file on your computer (.PDF format preferred) and then upload it to the ANGEL drop box for this homework assignment. ________________________________________________________________________ 1. Use the graph below to answer the following questions. (26 points)
a. What is the absolute value of the price elasticity of demand between P=100 and P=80? (5 points) i. Based on the value you calculated, is demand elastic, inelastic, or unit elastic? (4 points) ii. What does the value you calculated imply about the relationship between price and quantity demanded? (4 points) b. What is the absolute value of the price elasticity of demand between P=40 and P=20? (5 points) i. Based on the value you calculated, is demand elastic, inelastic, or unit elastic? (4 points)
ii.
What does the value you calculated imply about the relationship between price and quantity demanded? (4 points)
2. Use the graph below to answer the following questions. (36 points each part is worth 4 points)
a. Elasticity values are greater than 1 in absolute value in the portion of the graph described by letter _____. b. Elasticity values are less than 1 in absolute value in the portion of the graph described by letter _____. c. Elasticity values are exactly equal to 1 in absolute value in the portion the of graph described by letter _____. d. The inelastic portion of the graph is the area described by letter _____. e. The elastic portion of the graph is the area described by letter _____. f. The unit elastic portion of the graph is the area described by letter _____. g. Total revenue is maximized over the portion of the graph described by letter _____. h. Total revenue is increasing when price increases over the portion of the graph described by letter _____. i. Total revenue is decreasing when price increases over the portion of the graph described by letter ______. 3. Suppose the demand for guitars in State College is given by Qd = 8,000 10P where Qd is the quantity demanded, and P is the price of guitars. Also, suppose the supply of guitars is given by Qs = 30P 2000, where Qs is the quantity supplied of guitars. (38 points)
a) Calculate the equilibrium price of guitars and the equilibrium quantity of guitars in State College. Show your work. (10 points) b) Suppose the actual price of guitars is $500. Determine if there is a shortage, a surplus, or if the market is in equilibrium at a price of $500. If there is a shortage or surplus, calculate how much the shortage or surplus is. (8 points) c) Given your answer to b), is the price of guitars likely to rise, fall, or stay the same? (4 points) d) Suppose guitars and guitar strings are complements. Draw a graph indicating what will happen in the market for guitar strings if the price of guitars decreases. Be sure to label your graph carefully, putting Price on the vertical axis and Quantity on the horizontal axis. You do not need to have actual numbers on this graph, but you should clearly indicate how the decrease in the price of guitars will affect the market for guitar strings, and what will happen to the equilibrium price and quantity of guitar strings. (16 points)