ARE100A INTERMEDIATE MICROECONOMICS:THEORY OF PRODUCTION AND CONSUMPTIONFALL QUARTER 2009Problem Set 8 answer1. Fred’s costs rise and others in the same market do not face the cost increase. Fred shuts down and goes out of business. Why didn’t Fred just raise his price by 30% and continue in the egg business? Fred and his neighbors face a very elastic demand curve. Raising his price even a little would reduce his sales to zero.2. Total market egg demand is E = 1000 – 10P. a. What is the elasticity of demand if price were $20 unit (Units are flats of eggs)?E=1000-200=800; dE/dP(P/E) = -10(20)/800 = -0.25 b. Supply from Iowa and other states outside California is E = 200 + 30P. Elasticity of supply at a price of $20? E from other states is 200+30(20) =800; dE/dP(P/E) = 0.75.c. Total supply includes supply from California farms. Demand function facing California producers? California sales are zero at $20 there is no quantity left. Elasticity of demand for California producers, if P = $20? Elasticity of demand is –infinity.
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