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Problem Set 03 (ECO100)

Problem Set 03 (ECO100) - Prof Gustavo Indart Department of...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Problem Set 3 1. Suppose that when the price of gasoline increases from \$0.48 to \$0.52 per litre, gasoline consumption falls from 10.1 million litres per year to 9.9 million litres in a particular town. Compute the arc elasticity of demand for gasoline. 2. If the income elasticity of demand for a commodity is 0.5, is the commodity an inferior good? Exactly what does an income elasticity of 0.5 mean? 3. The equations of the market demand and supply curves for potatoes are as follows: P = 50 – 4Q P = 25 + Q where P is in cents/kilo and Q is in thousands of kilos. a) Graph the demand and supply curves and find the equilibrium price and quantity. b) Calculate the point elasticity of demand at: P = 40; P = 25; and P = 15. As one moves to lower prices, what happens to the “point elasticity of demand?” A one moves to lower prices, what happens to the slope of the demand curve? c) Suppose the government imposes a price floor of 32 cents per kilo as a farm support measure and agrees to buy any surplus resulting from this program. Calculate the cost of this policy to the government. d) Suppose a fungus destroys much of the potato crop and, as a result, the equilibrium price rises to 40 cents per kilo. Calculate the arc price elasticity of demand between the original and the new equilibrium prices. Will the farm revenue rise or fall as a result of the crop failure?

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Problem Set 03 (ECO100) - Prof Gustavo Indart Department of...

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