Solution to Problem Set 03 _ECO100_

Solution to Problem Set 03 _ECO100_ - Prof Gustavo Indart...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Solutions to Problem Set 3 1. % Q d η d = % P Q * P ave Arc η d = where P ave = (P 1 + P 2 ) / 2 and Q ave = (Q 1 + Q 2 ) / 2 P * Q ave (10,100,000 – 9,900,000) (0.48 + 0.52) / 2 = (0.48 – 0.52) (10,100,000 + 9,900,000) / 2 = 0.25 [or 0.25 in absolute value] (or note that quantity falls by 20% [ 200,000 / 10,000,000] when price increases by 8% [0.04 / 0.50] giving elasticity of 0.25 [or of 0.25 in absolute value]). 2. Income Elasticity is negative in the case of an inferior good because quantity demanded and income change in opposite directions. An income elasticity of +0.5 means that: 1) quantity demanded and income change in the same direction and thus this good is a normal good; and 2) the percentage change in quantity demanded is half (i.e., smaller than) the percentage change in income and thus this normal good has an inelastic income elasticity at this point of the demand curve.

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2 3. a) Equilibrium: D = S Æ 50 4 Q = 25 + Q Æ 5 Q = 25 Æ Q* = 5 Substituting into either the demand or the supply curve we find P*: P* = 50 – 4 Q* = 50 – 20 = 30 cents. b) To calculate the Point Elasticity, let’s use the following equation: η d = (1 / slope) * (P / Q) i) When P = 40, 40 = 50 – 4 Q Æ 4 Q = 10 Æ Q = 2.5 and
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Solution to Problem Set 03 _ECO100_ - Prof Gustavo Indart...

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