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Tutorial 5

This document outlines exercises to be covered in a tutorial on economics. The exercises include calculating market equilibrium, consumer and producer surplus given demand and supply functions; determining the impacts of government intervention in a market on surplus; calculating various price elasticities of demand including midpoint and point elasticity using demand curves; determining the price at which revenue from meat pies is maximized; defining own-price elasticity and examples of inelastic, elastic, and perfectly inelastic goods; and identifying the relationship between complementary goods when the price of one changes. Additional exercises cover income elasticity of demand and the effects of price changes on demand.

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Yeji
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163 views

Tutorial 5

This document outlines exercises to be covered in a tutorial on economics. The exercises include calculating market equilibrium, consumer and producer surplus given demand and supply functions; determining the impacts of government intervention in a market on surplus; calculating various price elasticities of demand including midpoint and point elasticity using demand curves; determining the price at which revenue from meat pies is maximized; defining own-price elasticity and examples of inelastic, elastic, and perfectly inelastic goods; and identifying the relationship between complementary goods when the price of one changes. Additional exercises cover income elasticity of demand and the effects of price changes on demand.

Uploaded by

Yeji
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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BUSS1040

Tutorial 5 Week 5
Exercises to be covered in the tutorial


1. Consider the demand function to be Qd = 100 – 5P and the supply function to be Qs = 5P.

a) What is the market equilibrium?
b) Calculate the consumer and producer surplus at the market equilibrium. What is the total
surplus?
c) Represent your solution on a clearly marked graph.


2. Consider a market with a market demand curve given by MB = 75 – Q and a supply curve
given by MC = 2Q. What are the CS and PS in the market equilibrium? If the government
intervenes in this market to increase or decrease the quantity traded, can it increase the
surplus (or welfare) generated? Use a diagram to help explain your answer.


3. The figure below shows the demand for pens. The demand curve D0 describes the demand
for pens when the price of refillable pencils is $2. The line D1 describes the demand for pens
if the price of refillable pencils were to rise to $4. D0 and D1 are straight lines and the
drawing is made to scale so, for instance, when P = 10 then Q = 20, when P = 8 then Q = 40
and so on.

Price
16
14

12
10

8
6
D1
4
2 D0

0
0 20 40 60 80 100 120 140
Pens per day


Parts a)-d) refer to changes in the price of pens, holding the price of pencils constant at $2.

1
a) Calculate the midpoint (arc) elasticity of demand for a rise in the price of pens from $2 to
$4.
b) Calculate the gradient (or slope) of the demand curve for pens. The gradient is constant
along a straight line and therefore also equal to the derivative of P with respect to Q
(dP/dQ). Now you can calculate dQ/dP in order to solve the part c.
c) Calculate the point elasticity of demand both at a price of $2 and at a price $4.
d) What happens to total sales revenue for pens as prices for pens change from $2 to $4?
e) Calculate the cross-price elasticity of demand for pens when the price of pens is $2 and the
price of refillable pencils increases from $2 to $4 (use the arc elasticity formula). Note,
when the price of refillable pencils increases from $2 to $4, the quantity demanded of pens
at price $2 increases from 100 to 120.

4. The demand for meat pies is given by Qd = 60000 – 10000P. The current price for meat pies is
$3.50.

a) If the price increases, will more or less money be spent on meat pies?
b) At what point will revenue on pies be maximized?



Additional exercises

5. Consider own-price elasticity of demand. What is it? What is the value of own price elasticity
of demand for a good that is:
a) Inelastic
b) Elastic
c) Perfectly inelastic


6. Last year, Judy’s income increased from $10 000 to $12 000. Judy purchased 11 concert
tickets this year, compared with 10 tickets last year. She ate instant noodles on 190
occasions this year, compared with 200 times last year.

a) Calculate Judy’s income elasticity of demand for both concert tickets and instant noodles,
using the arc elasticity concept.
b) Suppose that in addition, you know that the prices of both concert tickets and instant
noodles have risen over the last year. What could you say about Judy’s income elasticity of
demand for each of these products in this case?
c) Suppose that there has been no change in the price of instant noodles over the last year,
but the price of instant curry flavored rice has risen. What could you say about Judy’s
income elasticity of demand for instant noodles?

2
7. When two goods, X and Y, are complements, which of the following occurs?
a) An increase in the price of good X leads to an increase in the price of good Y.
b) An increase in the price of good X leads to a decrease in the quantity demanded of good Y.
c) An increase in the price of good X leads to a decrease in demand for good Y.
d) An increase in the price of good X leads to an increase in demand for good Y.

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