CH1 Solutions

CH1 Solutions - 306-310 ENGINEERING ECONOMY SOLUTIONS TO...

This preview shows pages 1–3. Sign up to view the full content.

1 3 0 6 - 3 1 0 E N G I N E E R I N G E C O N O M Y SOLUTIONS TO PROBLEM SET #1 – INTRODUCTION 1. i) The initial demand and supply curves for the product are shown below. The intersection of the demand and supply curves determines market equilibrium conditions, which are at a price and quantity of approximately \$41.60 per unit and 20 600 units/month , re- spectively. ii) Arc elasticity (AE) of demand: AE D = - { [Q 2 - Q 1 ] / [(Q 1 + Q 2 ) / 2] } / { [P 2 - P 1 ] / [(P 1 + P 2 ) / 2] } or, AE D = - [ (Q 2 - Q 1 ) / (Q 1 + Q 2 ) ] / [ (P 2 - P 1 ) / (P 1 + P 2 ) ] At P 1 =30, Q 1 =28 750, and at P 2 =35, Q 2 =25 000; thus AE D = 0.907 At P 1 =40, Q 1 =21 750, and at P 2 =45, Q 2 =18 750; thus AE D = 1.259 At P 1 =50, Q 1 =16 250, and at P 2 =55, Q 2 =14 250, thus AE D = 1.377 At P 1 =55, Q 1 =14 250, and at P 2 =60, Q 2 =12 500, thus AE D = 1.505 Arc elasticity of supply: AE S = [ (Q 2 - Q 1 ) / (Q 1 + Q 2 ) ] / [ (P 2 - P 1 ) / (P 1 + P 2 ) ] 20 30 40 50 60 70 10000 15000 20000 25000 30000 35000 QUANTITY (units/month) PRICE (\$/unit) Demand Supply Shortage

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 At P 1 =30, Q 1 =12 000, and at P 2 =35, Q 2 =16 000; thus AE S = 1.857 At P 1 =40, Q 1 =19 500, and at P 2 =45, Q 2 =22 500; thus AE S = 1.214 At P 1 =50, Q 1 =25 000, and at P 2 =55, Q 2 =27 000; thus AE S = 0.808 At P 1 =55, Q 1 =27 000, and at P 2 =60, Q 2 =28 500, thus AE S = 0.622 The price elasticity of demand tends to be higher at higher price levels. This is typical of de- mand functions. The opposite is observed with respect to the supply function, i.e. higher elastic- ities are obtained at lower price levels. This is typical of supply functions. iii) The total consumer expenditure is the product of price and quantity demanded . For the demand schedule given, the values are: Price (\$/unit) Total Consumer Expenditure (\$) 60 750 000 55 783 750 50 812 500 45 843 750 40 870 000 35 875 000 30 862 500 The maximum total consumer expenditure is attained at a price of \$35/unit. The price elasticity of demand is unitary at the price level at which total consumer expenditure is maximised. As indicated in part ii above, the elasticity of demand is unitary in either the upper portion of the \$30-35 price interval or the lower portion of the \$35-40 interval, thus confirming our observation in the table above. iv)
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 8

CH1 Solutions - 306-310 ENGINEERING ECONOMY SOLUTIONS TO...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online