Extra Problems Sheet 1

Ch 2 - Demand, Supply, and equilibrium Prices

Ch 3 Demand Elasticities

Problem 1 Shifts in Demand and Supply

For each statement indicate whether the demand curve or the supply curve of chicken will shift
to the right or to the left and specify the variable that caused the shift

Note that Chicken is considered as a normal good

1- As the Income of Mr. brown increased he purchases more chicken nuggets

2- When the price of meat decreased by 20%, consumers decreased their chicken
consumption.
3- The government provided chicken vaccines to farmers raising chicken
4- Chicken producers are facing high production taxes.

What effect will each of the following have on the supply of automobile tires?

1- A technological advance in the methods of producing tires.

2- A decline in the number of firms in the tire industry.
3- An increase in the price of rubber used in the production of tires.
4- The expectation that the equilibrium price of auto tires will be lower in the future than it
is currently.
5- The charging of a per-unit tax in each auto tire sold.
6- The granting of a 50-cent-per-unit subsidy for each auto tire produced.
Problem 2 Equilibrium D and S and autoregulation

Below is the market demand and supply for motorcycles:

(D): Q = 100 000 – 6P (S): Q = 14P – 150 000
1- Find the equilibrium price and quantity.
2- If the price is equal to $15 000, will there be a shortage or a surplus? Explain.
3- Calculate the excess in the market.
4- Calculate the quantity traded of motorcycles at that price.
5- How does this situation affect the price?
Problem 3 Equilibrium D and S and autoregulation

Suppose the following two equations:

P = 50 – 2Qd and P = 10 + 2 Qs

1- Draw the demand and supply.

2- What is the equilibrium price and quantity?
3- Suppose the price on the market is 25$ is there a shortage or a surplus? What is its amount?
And how will the economy autoregulate itself?
4- Suppose the price on the market is 35$ is there a shortage or a surplus? What is its amount?
And how will the economy autoregulate itself?

Problem 4 Equilibrium D and S and autoregulation

Assume that the demand and supply of hamburgers can be represented in the following
diagrammatic model.

3.5

2.5
price ($)

2
Supply
1.5 Demamd
1

0.5

0
0 1 2 3 4 5 6 7 8 9
quantity / period

1- What is the equilibrium quantity Q1, and the equilibrium price P1.
2- Derive the demand equation.
3- Suppose the price on the market is 3 what is the prevailing situation.
4- How will the economy auto regulate itself?

Problem 5 PED and TR

Given the demand curve Qd = 200 - 4P

1- How much is the quantity demanded at a price of 9 dollars? 11 dollars?

2- Use the above information to find the elasticity of demand if the price increases from $9
to $11.
3- According to your answer in part 2, state whether the demand is elastic or inelastic. And
how would the increase in price affect total revenue.

Problem 6 PED and TR

Given the following demand and supply equation for the furniture market.

D: P = 400 – 0.6Q S: P= 50 + 0.1Q

1- Calculate the equilibrium price and quantity.

2- Calculate price elasticity of demand as the price increases from 100$ to 150$. Interpret your
result.
3 – Use your result in the previous question to state weather this increase in price will lead to an
increase or decrease in the total revenue.

4 – Calculate total revenue at the price of 100$ and 150$ and prove your analysis in question 3.

Problem 7 Calculating elasticities from a demand equation

Suppose the demand for good X is given by Qdx = 500 – 10Px + 2Py + 0.7 I where Px is the price
of good X. Py is the price of some other good Y, and I is income. Assume that Px is currently $10,
Py is currently $5, and I is currently $100

1- What is the elasticity of demand for good X with respect to its price at the current
situation? Interpret your result

2- What is the cross-price elasticity of the demand for good X with respect to the price of
good Y at the current situation? What can you tell about X and Y.

3- What is the income elasticity of demand for good X at the current situation? Comment on
the type of good X.
Problem 8 Equilibrium and PED

Assume that the demand and supply for a commodity is represented by the equations:
P = 10 - 0.2Qd
P = 2 + 0.2Qs
Where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price.
1- Using the equilibrium condition, solve the equations to determine equilibrium price and
equilibrium quantity.

2- Calculate the price elasticity of demand and the price elasticity of supply at the
equilibrium price. Use the point elasticity formula to compute these two values of these
elasticities

Problem 9 Equilibrium and Elasticities

Firm A produces batteries and has the following supply equation: P=5+0.1Q and it faces a
market demand defined by P=20-0.2Q

1- Calculate the equilibrium price and quantity

2- Calculate price elasticity of demand and the price elasticity of supply as the price increases
from 10$ to 15$. Interpret your result.

3 – Use your result in the previous question to state weather this increase in price will lead to an
increase or decrease in the total revenue

4 – Calculate total revenue at the price of 10$ and 15$ and prove your analysis in question 3

5- Firm B has the same supply curve as Firm A but it faces a demand defined by Q=50

5.1 What is the equilibrium price and quantity of Firm B

5.2 Calculate the price elasticity of demand as the price increases from 10 to 15$. Interpret result

6- Calculate the cross price elasticity of demand between batteries and energizers given that the
price of energizers decreases from 10$ to 7$ while the quantity demanded of batteries decreases
from 50 to 30 units. Analyze your results.

7- Calculate income elasticity of demand, as income increases from 500$ to 600$ and the
quantity demanded of batteries decreases from 2 to 1. Analyze your results.
Problem 10 Calculating elasticities from a demand equation

Suppose the demand for good X is given by Q dx = 200 – 10Px + 5Py + 0.6 I , where Px is the price
of good X. Py is the price of some other good Y, and I is income. Assume that P x is currently $5,
Py is currently $10, and I is currently $400

1- What is the elasticity of demand for good X with respect to its price at the current
situation? Use the point elasticity formula. Interpret your result
2- What is the cross-price elasticity of the demand for good X with respect to the price of
good Y at the current situation? Use the point elasticity formula. What can you tell about
X and Y
3- What is the income elasticity of demand for good X at the current situation? Use the point
elasticity formula. Comment on the type of good X.

Problem 11 Elasticities

Suppose that business travelers and vacationers have the following demand for airline tickets
from Dubai to Beirut:

Price $ Quantity Demanded Quantity Demanded

(business travelers) (Vacationers)
150 2100 Tickets 1000 Tickets
200 2000 Tickets 800 Tickets
250 1900 Tickets 600 Tickets
300 1800 Tickets 400 Tickets

1 - As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i)
business travelers and (ii) vacationers? (Use the midpoint formula)
2 - Why might vacationers have a different elasticity of demand for tickets from business
travelers? Explain
Part B

Fadi says “I buy 10 liters of gas every week regardless of their price”. What is the value of Fadi’s
price elasticity of demand for gas? Explain

Part C

You have the following information about Good X and Good Y:

 Income elasticity of demand for Good X = -3

  Cross-Price elasticity of demand for Good X with the respect to the price of Good Y=2

Would an increase in income and a decrease in the price of good Y unambiguously decrease the
demand for good X? Why or why not?

Problem 12 Elasticities

1 - Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand
made chocolate. You, the economist, have calculated the elasticity of demand for
chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice
will you give her and why?  Be able to explain your answer.
2 - If the price of good increases by 8% and the quantity demanded decreases by 12%, what
is the price elasticity of demand?  Is it elastic, inelastic or unitary elastic?
3 - Discount stores sell relatively elastic goods.  Ceteris paribus, explain why selling at a
relatively low price is profitable for them?

4 - In summer 2007, Sony decided to cut the price of its PlayStation 3 video game console
from 600$ to 500$. One industry analyst forecast that the price cut would increase sales
from 80,000 units per month to 120,000 units per month. Assuming the analyst’s forecast
is correct, use the midpoint formula to calculate the price elasticity of demand for
PlayStation 3.
5 - If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut
butter and milk substitutes or complements?  Be able to explain your answer.
6 - A 10 percent increase in income brings about a 15 percent decrease in the demand for a
good. What is the income elasticity of demand and is the good a normal good or an
inferior good?  Be able to explain your answer.
Problem 13 PED and TR

The below table provides the Price Elasticity of Demand for Movie Tickets as Measured by the
Elasticity Coefficient. The demand equation for Movie Tickets is P = 9 – Q

1- What is the value of the maximum total revenue?

2- What do you expect to happen for Total revenue as the price of a movie ticket decreases
from $8 to $7?
3- Use total revenue test to prove that demand is inelastic as price decreases from $3 to $1
Problem 14 Elasticities

Part A and B are Independent

Part A:

1 - Given the following information, calculate the Income Quantity

Income Elasticity of demand. And comment. $ 500 5
$ 1,000 6

2 - Given the following information, calculate the

Cross price elasticity of demand. And Price of X Quantity of Y
comment. $ 100 5000
$ 50 3000

Part B:
Suppose that the price elasticity of demand for gasoline is 0.2 in the short run and 0.7 in the long
run. If the price of gasoline rises by 28%, what effect on quantity demanded will this have…?

1 - In the short run?

2 - In the long run?
3 - Comment on the results from a and b.

Problem 15 PED and TR

Suppose that the below total revenue curve is derived from a particular linear demand curve

1- What is the price of good X when total revenue is $20

2- Calculate price elasticity of demand when price increases from $4 to $5
3- Comment on total revenue based on the result calculated above
4- Prove that demand is inelastic when TR decreases from $14 to $8