ECO 2013 Set 3 Exercises

# ECO 2013 Set 3 Exercises - ECO 2013 Fall 2010 Examples...

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ECO 2013, Fall 2010 Examples Related to Problem Set 3: Elasticity Example 1: The elasticity of supply is 4/3. That means that along a given supply curve a 3% increase in price causes a 4% increase in quantity supplied, from the definition of elasticity. Example 2: A reduction in supply increases the price of walnuts from \$16 to \$20, and reduces the quantity demanded from 210 tons to 190 tons. The elasticity of demand is ELAS = [(210-190)/0.5(190+210)]/[(20-16)/0.5(16+20)] ELAS = (10/200)/(4/18) = 0.225. Notice that this represents inelastic demand. That implies, strangely enough, that walnuts do not have close substitutes. Your instructor has no idea whether that is true. Example 3: The almond market has only two customers, Professor Rush and the Director. At a price of \$10 Professor Rush buys 20 pounds and the Director buys 30 pounds. At a price of \$16 Professor Rush buys 14 pounds and the director buys 20 pounds. What is the market elasticity of demand over that interval. Add the demand curves horizontally:

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ECO 2013 Set 3 Exercises - ECO 2013 Fall 2010 Examples...

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