2009PS_1_Solutions

# 2009PS_1_Solutions - AEM 4150 Price Analysis Fall Semester...

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1 AEM 4150 Price Analysis Fall Semester 2009 Homework Assignment 1 Suggested Solutions Problem 1 a. An increase in demand refers to a shift in the demand curve to the right. Whereas, an increase in the quantity demanded refers to a movement along the demand curve. (1 point) b. If the alternative is a substitute, demand will shift back (to the left) and both price and quantity decrease. If the alternative is a complement, demand will shift to the right and both price and quantity will increase. (2 points) Substitute: Complement: c. Nothing happens to the demand curve. A decrease in the price will result in a movement along the demand curve (down). Thus, quantity of the product demanded will increase. (1 points) P Q D 0 S 0 P 0 D 1 P 1 Q 0 Q 1 P Q D 0 S 0 P 0 D 1 P 1 Q 0 Q 1 P Q D 0 P 0 P 1 Q 0 Q 1

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2 d. (3 points) Own price elasticity (at a point) is defined as: i i i i ii P dP Q dQ E It can be interpreted as the percentage change in quantity demanded given a one percentage change in the price of that product, other factors being held constant. The income elasticity (at a point) is defined as: Y dY Q dQ E i i iy The income elasticity can be interpreted as the percentage change in the quantity corresponding to a 1 percent change in the income, other factors being held constant. The cross price elasticity (at a point) is defined as:
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## 2009PS_1_Solutions - AEM 4150 Price Analysis Fall Semester...

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