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 (arcelasticity) 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 Tshirts according to average income.
Tshirt 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 Tshirts 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 Tshirt 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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 Spring '10
 fernando
 Price Elasticity, Supply And Demand, Volkswagen

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