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Ans_HW1

# Ans_HW1 - Answer to homework2 2.16 a Substituting the...

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Answer to homework2 2.16. a) Substituting the values of R and T , we get P Q Supply P Q Demand s d 5 14 : 2 70 : + - = - = In equilibrium, 70 – 2 P = –14 + 5 P , which implies that P = 12. Substituting this value back, Q = 46. b) Elasticity of Demand = –2(12/46), or –0.52. Elasticity of Supply = 5(12/46) = 1.30. c) 43 . 0 ) 46 10 ( 2 tan , - = - = ium ti golf ε . The negative sign indicates that titanium and golf balls are complements, i.e., when the price of titanium goes up the demand for golf balls decreases. 2.18. a) Since the two goods are rather close substitutes for each other, you would expect that the demand for Tylenol would go up if the price of Advil increases and vice versa. Therefore, the cross price elasticity will be positive. b) Similar to part (a). Although VCRs and DVD players are not very close substitutes, if the price of VCRs were to go up substantially, potential buyers would probably decide to pay a little bit more and get the higher-end DVD player. Similarly if the latter becomes expensive, some consumers will not be able to afford it and will switch to the VCR instead. The elasticity will be positive. c) Since the two usually go together, a sharp increase in the price of one will

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