ECO 110 Principles of Economics, Microeconomics
Instructor: He Yan
Suggested Answers to Assignment 2
Edition, Problems and Applications
1. Chapter 5, Question 2
For business travelers, the price elasticity of demand when the price of tickets rises from $200 to $250
is [(2,000 – 1,900)/1,950]/[(250 – 200)/225] = 0.05/0.22 = 0.23. For vacationers, the price elasticity of
demand when the price of tickets rises from $200 to $250 is [(800 – 600)/700] / [(250 – 200)/225] =
0.29/0.22 = 1.32.
The price elasticity of demand for vacationers is higher than the elasticity for business travelers
because vacationers can choose more easily a different mode of transportation (like driving or taking
the train). Business travelers are less likely to do so because time is more important to them and their
schedules are less adaptable.
2. Chapter 5, Question 3
The percentage change in price by using midpoint method is equal to (2.20 – 1.80)/2.00 = 0.2 = 20%. If
the price elasticity of demand is 0.2, quantity demanded will fall by 4% in the short run [0.20
the price elasticity of demand is 0.7, quantity demanded will fall by 14% in the long run [0.7
Over time, consumers can make adjustments to their homes by purchasing alternative heat sources
such as natural gas or electric furnaces. Thus, they can respond more easily to the change in the price
of heating oil in the long run than in the short run.
3. Chapter 6, Question 3
The equilibrium price of Frisbees is $8 and the equilibrium quantity is six million Frisbees.
With a price floor of $10, the new market price is $10 because the price floor is binding. At that price,
only two million Frisbees are sold, because that is the quantity demanded.
If there’s a price ceiling of $9, it has no effect, because the market equilibrium price is $8, which is
below the ceiling. So the market price is $8 and the quantity sold is six million Frisbees.
4. Chapter 6, Question 4
Figure 1 shows the market for beer without the tax. The equilibrium price is P1 and the equilibrium
quantity is Q1. The price paid by consumers is the same as the price received by producers.
When the tax is imposed, it drives a wedge of $2 between supply and demand, as shown in Figure 2.
The price paid by consumers is P2, while the price received by producers is P2 – $2. The quantity of
beer sold declines to Q2.