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ECO101-PS4 - MIDDLE EAST TECHNICAL UNIVERSITY NORTHERN...

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MIDDLE EAST TECHNICAL UNIVERSITY – NORTHERN CYPRUS CAMPUS ECO 101 (01, 02, 03) FALL 2010 PROBLEM SET 4 Part A. Problems 1. The table below gives the demand schedules for good A when the price of good B (P B ) is 8 YTL and 12 YTL. Complete the last column of the table by computing the cross elasticity of demand between goods A and B for each of the three prices of A. Are A and B complements or substitutes? (Use mid- point (arc-elasticity) formula) P B = 8 YTL P B = 12 YTL P A Q A Q’ A Elasticity 8 2000 4000 7 4000 6000 6 6000 8000 2. i) P = 40 – 0.5Q ii) Q = -4 + 0.75P iii) 4Q + 4P = 64 a. Calculate price elasticity of demand or supply for the functions (i), (ii), (iii) when P=8 and when P=6. b. Calculate the arc elasticity of demand between P=6 and P=8 for (i) 3. The following table shows the price and yearly quantity of T-shirts according to average income. T-shirt price Quantity demanded (average income is $20,000) Quantity demanded (average income is $30,000) $4.50 2,400 3,600 $5.50 1,600 2,800 $6.50 800 2,400 $7.50 400 1,800 a. Calculate the price elasticity of demand (using the midpoint method) when the price of T-shirts rises from $4.50 to $5.50, when average income is $20,000. b. Calculate the income elasticity of demand (using the midpoint method) when average income increases from $20,000 to $30,000, when the price of a T-shirt is $4.50. 4. Assume you are an analyst employed by an automobile manufacturer. a. Last year your company sold 50,875 compact cars. All else equal, it is expected this year that average incomes will decrease by 5% as compared to the last year. In addition, your research department estimates that the corresponding arc income elasticity of demand for your compact cars is +0.7. Given this information, how many compact cars do you estimate that your company will sell this year?
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