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# Assignment1_Answer_Key - price changes If demand is elastic...

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ECON 103, Spring 2009 Simon Fraser University Assignment 1 Answer Key Problem 1 (5 marks) (a) maximum amount a consumer is willing to pay for ﬁxed quantity is TV=26. (b) CS at price of 80 cents is 10 dollars. CS at price of 60 cents is 14.4. Maximum mem- bership fee will leave the consumer indiﬀerent between shopping at these prices; max. membership is 4.4. Problem 2 (5 marks) CALCULATIONS (1 point) When quantity is equal to 1, 2, 2.5, 3, 4 price is equal to 8, 6, 5, 4, 2 total revenue is 8, 12, 12.5, 12, 8. Elasticity= - . 5 P Q = -4, -3/2, -1, -2/3, -.25. EXPLANATION (4 points) The question directly asks how and under what circumstances increasing price will lower TR: increasing price will always lower the quantity sold (by the law of demand). As a result to- tal revenue might increase or decrease depending on how sensitive quantity demanded is to
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Unformatted text preview: price changes. If demand is elastic - the quantity demanded is price sensitive and small increase in price will result in large decrease in quantity sold (percentage decrease in Q is larger than percentage increase in P ), the total revenue will fall . This is what was required for full marks. Problem 3 (5 marks) Q 1 = 30 (a) P 2 = 1, P 2 = 1 . 25 Q 1 = 39. Δ P 2 = . 25, Δ Q 1 = 9. Using the initial price and quantity: E 12 = 9 . 25 · 2 30 = 1 . 2. Substitutes. Using average price and quantity is okay as long as the formula is provided. (b) M = 25 , 000 M = 30 , 000, Q 1 = 36. E M = 6 5 , 000 · 25 , 000 30 = 1. Normal good. 1...
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