# AK3 - Rice University ECON 211, Spring 2009 Answer Key for...

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Rice University ECON 211, Spring 2009 Answer Key for Problem Set 3 Question 1 . (15 pts.)Lipsey, Chapter 4, Question 2 (page 93) a) The table should be completed as shown below. Note that elasticities are computed “between the rows,” reflecting the change in quantity and prices between points on the demand curve. Price Q D Expenditure % Price % Quantity Elasticity \$11 1 \$11 20 100 5 9 3 27 25 50 2 7 5 35 33.3 33.3 1 5 7 35 50 25 ½ 3 9 27 100 20 1/5 1 11 11 b) The diagram of the demand curve is shown below. Note that students have been told to not worry about the sign of price elasticity (or just take the absolute value), so if they have all positive figures, that’s fine.

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Question 2 . ( 5 pts. ) Fill in the following table: a) Recall that total revenue equals price times quantity. When price goes up, the quantity demanded goes down by a larger proportion because elasticity (in absolute value) is greater than one, i.e. demand is elastic. b) Since the elasticity is 0, the demand is vertical. This means that, whatever the price is, the quantity sold will not change; a decrease in price will decrease the total revenue. c) Price elasticity is less than 1, i.e. it is an inelastic demand curve. That means quantity demanded fall less compared to an increase in prices. Thus, revenue goes up if and only if price goes up. Question 3 . ( 20 pts. ) The supply function of bananas is given by Ps = 1/2 Q and the demand is estimated to be Pd = 6 - Q . a) Solving the two equations simultaneously, we get Q* = 4 and P* = 2.
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## This note was uploaded on 04/10/2010 for the course ECON 211 taught by Professor Na during the Fall '08 term at Rice.

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AK3 - Rice University ECON 211, Spring 2009 Answer Key for...

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