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Chapter 3: Problems 1, 2 and 3

# Chapter 3: Problems 1, 2 and 3 - RishiSanghvi...

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Rishi Sanghvi  Cost Benefit Analysis  Econ 4210-01 HW 1 Due: 02/12/2010 Question 1:  Demand for gizmos: q = 6 – 0.5p + 0.0002I  Income: \$40,000 (a) Demand (q) will fall to 0 (the choke price) when:  6 – 0.5p + 0.0002(40,000) = 0 p = \$28  (b)  Demand (q) when market price (p) is \$10: q = 6 – 0.5(10) + 0.0002(40,000) q = 9 (c) Price elasticity of demand =  ∂ ∂ q p  *  pq  = -0.5 * 109  = -  59  = -0.56 Price elasticity of demand = -  59 (d)  Consumer Surplus (CS) = 0.5 * (28-10) * (9) = \$81 Consumer Surplus = \$81 (e)  p = \$10; q 1  = 9 p 1  = \$12; q 2  = 8 CS 2  = 0.5 * (28-12) * (8) = \$64 ∆CS = 0.5 * (q 1  + q 2 ) * (p 2  – p 1 ) = 0.5 * (9+8) * (12-10) = \$17 Consumer surplus lost = ∆CS = CS 1  – CS 2  = \$17 ∆CS = \$17 (f) 1 | P a g e

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I=\$60,000 p = \$10; q 1  = 13 p 1  = \$12; q 2  = 12 CS 1  = 0.5 * (36-10) * (13) = \$169
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Chapter 3: Problems 1, 2 and 3 - RishiSanghvi...

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