SectionWS3 - might be two effects Elasticities Exercise...

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Econ 100A - Worksheet #3 Demand, supply, elasticities Demand Functions Exercise 1 (Practicing) For the following demand functions: Find out whether it satisfies the law of demand. Compute and plot the inverse demand function. a) Q d ( p ) = 5 - 2 p . b) Q d ( p ) = 1 2 - p . c) Q d ( p ) = p 2 . d) Q d ( p ) = 100 / p . Exercise 2 (Shocks on Demand Functions) Consider the market for DVD players during the 1990s. The demand function on this market is given by: Q d ( p ) = 20 - 4 p, where p is the price in hundreds of dollars and demand is in millions. 1) Compute the inverse demand function and plot it. 2) Would it be necessary to redraw this function to illustrate the effect of a price cut from 400 to 300? 3) The price of DVDs is now half as much as it used to be. What do you think will be the effect of such a change on the demand for DVD players? Illustrate this effect graphically. 5) Most computers can now read DVDs, however most consumers prefer to watch DVDs on a larger screen. What do you think will be the effect of such a change on the demand for DVD players? Illustrate this effect graphically [Hint: there
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Unformatted text preview: might be two effects]. Elasticities Exercise 3 (Computing Point Elasticities) Compute the price-elasticities of the following demand functions: a) Q d ( p ) = 3-2 p , b) Q d ( p ) = a-bp , a,b > . c) Q d ( p ) = 10 p-3 , d) Q d ( p ) = Ap-ε , A, ε > . (Demand functions of this type are known as iso-elastic functions. Can you figure out why?) Exercise 4 (Computing Arc Elasticities) Consider the following table that gives some observations for a demand function: Price 1 2 3 4 5 6 Quantity 120 100 80 60 40 20 1) Plot this demand function using only these date. 2) Compute the arc price elasticities at each point using the midpoint formula. 3) A demand function that fits the data is Q d ( p ) = 120-20 p . Compute the point price elasticities at each value of p in the table and compare them to the empirical ones. Discuss the results. 1...
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