h4_ans - Income elasticity is defined as the percent change...

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1 The Colorado College Department of Economics and Business Block 7 Econ 207 HW 4 ans. 1. (a) I = \$10,000, P' = 25 Q = 1,000 + 0.3(10,000) – 300P + 299(0.25) = 4074.75 – 300P Q = 0 when 0 = 4074.75 – 300P, 300P = 4074.75 P = 13.5825 cents/lb. (b) Q = 1,000 + .3(20,000) – 300P + 299(0.25) = 7074.75 – 300P Q = 0 when 0 = 7074.75 – 300P P = 7074.75/300 = 23.5825 (c) Q = 1,000 + .3(10,000) – 300P + 299(0.10) = 4029.9 – 300P Q = 0 when 0 = 6,000 – 300P, P = 4029.9/300 = 13.433 (d) 2. (a) When price of VCRs fall from \$300 to \$270 it is a 10 per cent decrease. Price elasticity is defined as the percent change in quantity demanded by the percent change in price. P falls by 10 percent, sales will increase by 10(1.3) = 13 percent. So new sales = 5.65 millions of VCRs. \$23.5825 4074.75 D Q 7074.75 \$13.5825 \$13.43 4029.9 P

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2 (b) A rise income from \$30,000 to \$31,500 represents an increase of 5 per cent. Now,
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Unformatted text preview: Income elasticity is defined as the percent change in quantity demanded by the percent change in income. I rises by 5 percent, sales will increase by 5(1.7) = 8.5 percent. New sales = 5.425 million. (c) A decrease in price of DVDs from \$500 to \$400 implies a 20 per cent decrease. Cross-price elasticity of VCRs is defined as the percent change in quantity demanded of VCRs divided by the percent change in price of DVDs. P' falls by 20 percent, sales fall by 20(0.8) = 16 percent. New sales = 4.2 millions. (d) The overall effect on sales depends on the three effects combined. Summing all the changes gives +13 + 8.5 – 16 = +5.5 percent increase in purchases. So, overall purchase of VCRs = 5.275 million. 3. (a) Tom Dick Harry Total P = 50 0 0 0 0 = 35 30 20 0 50 = 25 50 60 25 135 = 10 80 120 100 300 = 0 100 160 150 410 (b) Total market demand for each price level is shown in column 4 above....
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