Bus 207 Exercise Example

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Demand examples

1. a. If the demand curve for wheat in the United States is P= 12.4 - 4QD where P is the farm price of wheat (in dollars per bushel) and QD is the quantity of wheat demanded (in billions of bushels), and the supply curve for wheat in the United States is P = -2.6 + 2QS where QS is the quantity of wheat supplied (in billions of bushels), what is the equilibrium price of wheat? What is the equilibrium quantity of wheat sold? Must the actual price equal the equilibrium price? Why or why not?

b. The lumber industry was hit hard by the subprime mortgage turmoil in 2008. Prices plunged from $290 per thousand board feet to less than $200 per thousand board feet. Many observers believed this price decrease was caused by the slowing of new home construction because of the glut of unsold homes on the market. Was this price decrease caused by a shift in the supply or demand curve?

2.After a careful statistical analysis, the Chidester Company concludes the demand function for its product is Q = 500 - 3P + 2Pr + 0.1I where Q is the quantity demanded of its product, P is the price of its product, Pr is the price of its rival’s product, and I is per capita disposable income (in dollars). At present, P = $10, Pr = $20, and I = $6,000.

a. What is the price elasticity of demand for the firm’s product? b. What is the income elasticity of demand for the firm’s product? c. What is the cross- price elasticity of demand between its product and its rival’s product? d. What is the implicit assumption regarding the population in the market?

3. After September 11, 2001, the Canadian federal government instituted a new tax on airline fares in Canada, to pay for enhanced airport security. There are a number of small carriers that fly between Canadian cities and specific Mexican cities. Let’s consider BeachAir (fictional). BeachAir’s price for a return flight between Vancouver and Acapulco...
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