PS4_S - 1 METU Department of Economics Econ 101:...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 2011-2012 Fall Semester Problem Set 4 with SOLUTIONS (Ch. 5 and Appendix to Ch. 5 in Case et al.; and Relevant Parts of Ch. 5&6 in Lipsey et al.) PART A - QUESTIONS Q.1) You are given the demand functions for different five goods as follows: Q D1 = 8 - 2P Q D2 = 9 - 3P Q D3 = 10 - 4P Q D4 = 11 - 5P Q D5 = 12 - 6P a) Find the price and quantity where the price elasticity of demand equals one (unitary elasticity) for each demand functions. using the point elasticity, ε D = (∆ Q D / ∆P) *( P / Q) = -1 Q D1 = 8 - 2P , -2*( P / Q) = -1 , then 2P=Q , and then Q D1 = 8 – Q, Q=4, P=2 Q D2 = 9 - 3P , -3*( P / Q) = -1 , then 3P=Q , and then Q D2 = 9 – Q, Q=9/2, P=3/2 Q D3 = 10 - 4P , -4*( P / Q) = -1 , then 4P=Q , and then Q D3 = 10 – Q, Q=5, P=5/4 Q D4 = 11 - 5P , -5*( P / Q) = -1 , then 5P=Q , and then Q D3 = 11 – Q, Q=11/2, P=11/10 Q D5 = 12 - 6P , -6*( P / Q) = -1 , then 6P=Q , and then Q D3 = 12 – Q, Q=6, P=1 b) Over what ranges of prices are demand for each good elastic? Q D1 = 8 - 2P , elastic demand if p > 2 (or if 2 < p < 4) Q D2 = 9 - 3P , elastic demand if p > 3/2 (or if 3/2 < p < 3) Q D3 = 10 - 4P , elastic demand if p > 5/4 (or if 5/4 < p < 5/2) Q D4 = 11 - 5P , elastic demand if p > 11/10 (or if 11/10 < p < 11/5) Q D5 = 12 - 6P , elastic demand if p > 1 (or if 1 < p < 2) c) Over what ranges of prices are demand for each good inelastic? Q D1 = 8 - 2P , inelastic demand if p < 2 (or if 0 < p < 2) Q D2 = 9 - 3P , inelastic demand if p < 3/2 (or if 0 < p < 3/2) Q D3 = 10 - 4P , inelastic demand if p < 5/4 (or if 0 < p < 5/4) Q D4 = 11 - 5P , inelastic demand if p < 11/10 (or if 0 < p < 11/10) Q D5 = 12 - 6P , inelastic demand if p < 1 (or if 0 < p < 1) 2 Q.2) The following table shows the price and quantity of brownie in Basri’s canteen for a semester according to average income. Brownie price Quantity demanded (average income is 3000 TL in a semester) Quantity demanded (average income is 5000 TL in a semester) 1 TL 2400 3600 1.5 TL 1600 2800 2 TL 800 2400 2.5 TL 400 1800 a) Calculate the price elasticity of demand (using the midpoint method) if the price of brownies rises from 1 TL to 1.5 TL, when average income is 3000 TL. % Change in quantity demanded = (1600 – 2400) / ((1600 + 2400) / 2)*100% = – 40% % Change in price = (1.5 – 1) / ((1.5 + 1) / 2)*100% = 40% Price elasticity of demand = , D P = % Change in quantity demanded / % Change in price = – 1 b) Calculate the income elasticity of demand (using the midpoint method) if average income increases from 3000 TL to 5000 TL, when the price of a brownie is 1 TL. % Change in quantity demanded = (3600 – 2400) / ((3600 + 2400) / 2)*100% = 40% % Change in income = (5000 – 3000) / ((5000 + 3000) / 2)*100% = 50% Income elasticity of demand = , D Y = % Change in quantity demanded / % Change in income = 4/5 = 0.8....
View Full Document

This note was uploaded on 01/05/2012 for the course ECON 101 taught by Professor Gulipektunc during the Spring '11 term at Middle East Technical University.

Page1 / 15

PS4_S - 1 METU Department of Economics Econ 101:...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online