Econ103_asst1_answers

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Unformatted text preview: ECON 103, Fall 2008 Simon Fraser University Assignment 1 Answers Problem 1 (a) TE = 12, CS=4, TV=16. (b) After paying the fee she will have net CS of 7.25, she should purchase the membership. Problem 2 CALCULATIONS (2 points) When price is equal to 9, 7.5, 5, 2.5, 1. Quantity is equal to 2, 5, 10, 15, 18 total revenue is 18, 37.5, 50, 37.5, 18. P Elasticity= -2 Q = -9, -3, -1, -.33, -.11. TR = 0 when Q=0 and Q=20. TR is maxed when Q=10 (demand is unit elastic). EXPLANATION (3 points) Lower price will increase total quantity sold. When demand is elastic the quantity is responsive to price changes and 1 percent decrease in price will result in Q increase by more than 1%. Therefore, although lower price raises lower revenue per unit, this impact will be more than offset by increase in quantity sold and TR will increase if price falls. Problem 3 Q0 = 30 1 0 (a) P2 = 5, P2 = 4 Q1 = 39. P2 = -1, Q1 = 9. Using the initial price and quantity: 5 9 E12 = -1 30 = -1.5. Complements. Using average price and quantity is okay as long as the formula is provided. 6 (b) M0 = 25, 000 M = 22, 500, Q1 = 36. EM = -2,500 25,000 . Obviously this is an inferior 30 good: lower income induces people to buy more pizza; income elasticity of demand is negative. As a practice try showing both situations on diagrams. 1 ...
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