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 % Qd 1. η d = % P Q * P Arc η D = where P = (P 1 + P 2 )/2 and Q = (Q 1 + Q 2 )/2 P * Q (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 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. 2. Income Elasticity is negative in the case of an inferior good because demand and income change in opposite directions. A income elasticity of +0.5 means that demand changes by half the percentage that income changes in the same direction that income changes. X is therefore a normal good with inelastic income elasticity. 3. a) Demand Curve: Y-intercept = 50 Supply Curve: Y-intercept = 25 slope = -4 slope = +1 Equilibrium: Pd = Ps 50 - 4.0Q = 25 1.0Q => Q = 5 => P = 30 cents by substitution into demand or supply equation b) Point Elasticity: Use η d = (1/slope)*(P/Q) P = 40 => Q = 2.5
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This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto- Toronto.

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Solution to Problem Set 03 (ECO100) - Prof. Gustavo Indart...

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