Pages: 5 (813 words) Published: April 29, 2014
﻿Homework 4 Master
1. College logo t-shirts priced at \$15 sell at a rate of 25 per week, but when the bookstore marks them down to \$10 it finds that it can sell 50 t-shirts per week. What is the price elasticity of demand for the logo t-shirts? Is the demand elastic or inelastic? Answer

Ed = -1.675 (elastic)

2. Check out the following video (http://www.youtube.com/watch?v=ncZkrO06le8). Do the early shoppers appear to have elastic or inelastic demand on Black Friday? Answer

Elastic. Very responsive to price changes.

3. In the accompanying table, assume that the price of ice skates increases from \$10 to \$20 per pair. Using the midpoint method, calculate the price elasticity of demand for ice skates for hockey players. Is demand elastic or inelastic?

Price of Ice Skates
Quantity Demanded (hockey players)

10
95
20
85
40
75
50
65
60
60

Ed = -0.16 (inelastic)
4. If a 20% increase in price causes a 10% drop in the quantity demanded is the price elasticity of demand elastic, unitary, or inelastic? Answer

-10= -0.5 (inelastic)
20

5. Characterize each of the following goods as perfectly elastic, relatively elastic, relative inelastic, or perfectly inelastic. a) A life-saving medication
b) Demand for a \$20 bill
c) A fast food restaurant located in the food court of a shopping mall d) The water bill you pay

A) Perfectly inelastic (QD unresponsive to change in price)
B) Perfectly elastic (only prepared to pay 1 price)
C) Elastic (lots of substitutes)
D) Inelastic (few substitutes)

6. A local paintball business receives total revenue of \$8,000 a month when they charge \$10 per person and they receive \$10,000 in total revenue when they charge \$6 per person. Over that range of prices, does the business face elastic, unitary, or inelastic demand? Answer

TR = P x Q

\$8,000 = \$10 x 800

\$10,000 = \$6 x 1,666.67

When price falls & TR rises, demand is elastic.

7. A college student enjoys eating pizza. Her willingness to pay for each slice is shown in the following table:

Number of Pizza Slices
Willingness to pay (per slice)
1
\$6
2
\$5
3
\$4
4
\$3
5
\$2
6
\$1
7
\$0

A) If pizza slices cost \$3, how many servings will she buy? How much consumer surplus does she enjoy? B) If the price of pizzas falls to \$2, how much consumer surplus does she enjoy?

A) 4 servings. CS = \$3 (\$6-\$3)
B) CS = \$4 (\$6-\$2)

Note: I was looking for the \$ amount per slice, but some students will have calculated the area of CS using the ½ x b x h formula. For part a), they should have ½ x 3 x 4 = 6. For part b), they should have ½ x 4 x 5 = 10. Accept this as correct.

8. Leah decides to buy a new sweater from Aritzia for \$80. Leah was willing to pay \$100. When her friend Becky sees the sweater, she loves it and thinks it is worth \$150, so she offers Leah \$125 for the sweater and Leah accepts. Leah and Becky are both thrilled with the exchange.

Determine the total surplus from the original purchase and the additional surplus generated by the resale of the sweater. (\$1,000)

Answer: Leah was willing to pay \$100 and the sweater cost \$80, so she keeps the difference, or \$20, as consumer surplus. When Leah resells the sweater to Becky for \$125, she earns \$25 in producer surplus. At the same time, Becky receives \$25 in consumer surplus since she was willing to pay Leah up to \$150 for the sweater but Leah sells it to her for \$125. The resale generates an additional \$50 in surplus. Thus, the two exchanges produced \$45 in consumer & producer surplus for Leah and \$25 in consumer surplus for Becky, for a grand total of \$70 in surplus.

9. Suppose that a new \$5.00 tax is placed on each cell phone. From the information in the following graph compute the incidence, deadweight loss, and tax revenue of the tax.

A) What is the incidence of the tax?
B) What is the deadweight loss of the tax?...