Solution to Problem Set 03 (ECO100)

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

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## 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.

### Page1 / 3

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online