AK3.2 - Rice University ECON 211, Fall 2009 Problem Set 3...

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Rice University ECON 211, Fall 2009 Problem Set 3 (100 points) Due on Friday, Sept. 18 Note that there are two parts to this assignment. You must hand in answers to questions in Part I. They will be graded. Questions in Part II will be discussed in the Tutorial sessions. You should not hand in answers for them. They will not be graded. Answers to all questions – in both Parts – will be posted on OwlSpace. Please keep your work neat: type your answers whenever possible. Thanks. Part I: Graded 1. (30 points) The accompanying table shows the hypothetical price and weekly quantity demanded of milk in the state of Texas. Price of milk ($ per gallon) Quantity of Milk demanded (gallons) 1 90,000 2 60,000 3 40,000 4 30,000 A. Calculate the price elasticity of demand when the price of a gallon of milk rises from $1 to $2. (Use the midpoint method) 6 . 0 1 000 , 30 000 , 75 5 . 1 = = - = P Q Q P d d p ε B. Calculate the price elasticity of demand when the price of a gallon of milk rises from $2 to $3. (Use the midpoint method) 1 1 000 , 20 000 , 50 5 . 2 = = - = P Q Q P d d p C. Calculate the price elasticity of demand when the price of a gallon of milk rises from $3 to $4. (Use the midpoint method) 1 1 000 , 10 000 , 35 5 . 3 = = - = P Q Q P d d p
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2. (30 points) (Similar to Krugman Chapter 5, Problem 2) In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and supply schedules for taxi rides. Quantity of rides (millions per year) Fare ($ per ride) Quantity demanded Quantity supplied 7.00 10 12 6.50 11 11 6.00 12 10 5.50 13 9 5.00 14 8 4.50 15 7 A. Assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system or price controls). Find the equilibrium price and quantity. The equilibrium quantity is where quantity demanded equals quantity supplied. This occurs at a quantity of 11 million rides per year. The price at this quantity is $6.50 per ride. B. Suppose that the mayor sets a price ceiling at $5.50. What is the quantity supplied?
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AK3.2 - Rice University ECON 211, Fall 2009 Problem Set 3...

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