Econ Problem Set 2

# Econ Problem Set 2 - Leo Spornstarr Bridget Hoffman...

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Leo Spornstarr Bridget Hoffman Thursday Discussion Econ 202 Problem Set 2 1a. Pat’s own price elasticity of demand for gas is 0. Because the equation for own-price elasticity is change in quantity over change in price, and Pat says he wants 10 gallons of gas before looking at the price, this means that his change in quantity is not dependent on the price. Actually he’ll never change the amount no matter the price, so his change in x =0. E = 0/(change in price) = 0. ADD A GRAPH 1a. 1b. 1b. Ron’s own price elasticity of demand for gas is infinity. As previously mentioned, the equation for own-price elasticity is change in quantity over change in price. Since he says he only wants \$10 of gas no matter what, he’ll buy \$10 of gas no matter what the quantity is that he will receive. Therefore his change in price is equal to 0. E = (change in quantity) / 0 = Infinity. Therefore his graph will have a straight line going across at whatever the price of gas is. 1c. In a practical sense, most real people would like the 10 gallons of gas for their car and always choose that one. That’s simply because you need your car to get places and if you have no gas, because the price is too high and you’re only willing to spend \$10, then you will have a major problem. Therefore, it’s most likely that a person would ask for the 10 gallons of gas. If the price of gas fluctuates a lot, then the chances are people will always want the 10 gallons of gas because otherwise you won’t know how much gas you’re going to get for \$10. Depending upon the price of gas you could get 1 gallon, or 5 gallons and depending upon if you’re in the middle of desert you may end up dead or in the next city instead. If the price of gas barely fluctuates, then people are more likely to ask for \$10 if they are concerned about the amount of money they are going to spend, because they will get more or less the same amount of gas regardless. 1d. The third guy Bob’s own price elasticity is unit-elastic.

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## This note was uploaded on 10/05/2011 for the course ECON 202-1 taught by Professor Zelder during the Spring '11 term at Northwestern.

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Econ Problem Set 2 - Leo Spornstarr Bridget Hoffman...

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