# PS3 Answer Key - a small increase in equilibrium price d In...

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Chapter 6 Elasticity Answer Key 1. a. Diet caffeine-free Pepsi because it is a narrowly defined good and therefore has more substitutes than soda in general. b. Filet mignon because it is a luxury and table salt is a necessity. c. Laptop computer, because it is a greater percentage of one’s budget than schoolbag. 2. a. 3 b. 1 c. 4 d. 6 e. 2 f. 5 3. C price elasticity of demand=percentage change in Q/percentage change in P 0.164= 5%/x, x=0.05/0.164=30.5%. 4. Automobile A Automobile B Figure 1 a. As Figure 1 shows, the increase in demand increases both the equilibrium price and the equilibrium quantity in both markets. b. In the market for automobile A (with less elastic supply), the increase in demand leads to a relatively large increase in the equilibrium price and a small increase in the equilibrium quantity. c. In the market for automobile B (with more elastic supply), the increase in demand leads to a relatively large increase in the equilibrium quantity and

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Unformatted text preview: a small increase in equilibrium price. d. In both markets, total consumer spending rises, because both equilibrium price and equilibrium quantity rise. 5. a. See S1. b. The new equilibrium price is P1 and quantity is Q1. The equilibrium tuition decreases and quantity of enrolled students increases. c. A is the proportion of the subsidy which increases the university income and B is the proportion of the subsidy which lows the student tuition. d. When demand is more elastic, the proportion of the subsidy which increases the university income increases (A&amp;gt;A) and the proportion of the subsidy which lower the students tuition decreases (B&amp;lt;B). Annual Tuition Quantity of enrolled students 20,000 S0 S1 D1 Q1 Pstudent A B 10,000 Pschool Q0 Annual Tuition Quantity of enrolled students 20,000 S0 S1 D0 Q1 Pstudent A B 10,000 Pschool Q0...
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