Demand N Supply Elasticity [PDF]

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Evanglin Makarawung 100613003 IIC



MICROECONOMICS 1. Suppose the demand and supply curves for eggs in the United States are given by the following equations: Qd = 100 – 20P Qs = 10 + 40P Where Qd = millions of dozen of eggs Americans would like to buy each year, Qs = millions of dozens of eggs U.S. farms would like to sell each year; P = price per dozen of eggs. a. Fill in the following table: Price (per dozen) Quantity Demanded (Qd) Quantity Supplied (Qs) $0.50 90 30 $1.00 80 50 $1.50 70 70 $2.00 60 90 $2.50 50 110 Answer: Qd = 100 – 20(0.50) = 100 – 10 = 90 Qs = 10 + 40(0.50) = 10 + 20 = 30 P = 1.00 Qd = 100 – 20(1.00) = 100 – 20 = 80 Qs = 10 + 40(1.00) = 10 + 40 = 50 P = 1.50 Qd = 100 – 20(1.50) = 100 – 30 = 70 Qs = 10 + 40(1.50) = 10 + 60 = 70 P = 2.00 Qd = 100 – 20(2.00) = 100 – 40 = 60 Qs = 10 + 40(2.00) = 10 + 80 = 90 P = 2.50 Qd = 100 – 20(2.50) = 100 – 50 = 50 Qs = 10 + 40(2.50) = 10 + 100 = 110 b. Use the information in the table to find the equilibrium price and quantity. Answer: The equilibrium price is $1.50 and the equilibrium quantity is 70 millions of dozen of eggs. c. Graph the demand and supply curves and identify the equilibrium price and quantity. Answer: P



Price per dozen of eggs



P = 0.50



2.50 2.00 1.50



equilibrium



1.00 0.50



20



p i z z a



p e r



30 40 50 60 70 80 90 100 110 Million of dozen of eggs : Quantity demanded : Quantity Supplied 2. Suppose the market demand for pizza is given by Qd = 300 – 20P and the market supply for pizza is given by Qs = 20P – 100, where P = price (per pizza) a. Graph the supply and demand schedules for pizza using $5 through $15 as the value Answer: P



P r i c e



10



Q



16



12 10



equilibrium



8 6 4 2 20



40



60



80 100 120 140 160 180 200 Quantity of pizza : Quantity demanded : Quantity supplied b. In equilibrium, how many pizzas would be sold and at what price? Answer: Pizza would be sold: 100 Price: $10 c. What would happen if suppliers set the price of pizza at $15? Explain the market adjustment process. Answer: If suppliers set the price of pizza at $15, then the pizza will not sell because with the price of $15 there would be no demand even if its supply is very high. 3. Fill in the missing amounts in the following table: % Change in price % Change In quantity Demand for Ben & n +10% -12% Jerry’s Ice Cream Demand for beer at -20% 10% San Francisco 49ers football game Demand for 15% -15% Broadway theater tickets in New York Supply of chickens +10% +12 Supply of beef cattle -15% -10% Answer: a. Demand for Ben & n Jerry’s Ice Cream: +12% = −1.2 −10% b. Demand for beer at San Francisco 49ers football game: 𝑏 = −0.5 −20% 𝑏 = (−0.5)(−20%) = 10% c. Demand for Broadway theater tickets in New York: −15% = −1.0 𝑐 −15% = −1.0𝑐 −15% =𝑐 −1.0 15% = 𝑐



Elasticity -1.2 -0.5 -1.0 +1.2 +0.5



Q



d. Supply of chickens: 𝑑 = 1.2 10% 𝑑 = (1.2)(10%) = 12 e. Supply of beef cattle: −10% = 0.5 −15% 4. Using the midpoint formula, calculate elasticity for each of the following changes in demand by a household. P1 P2 Q1 Q2 Demand for a. long distance telephone $0.25 per min $0.15 per min 300 min per 400 min. per services month month b. Orange juice 1.49 per qt 1.89 per qt 14 qt per 12 qt per month month c. Big Masc 2.89 1.00 3 per week 6 per week d. Cooked shrimp $9 per lb $12 per lb 2 lb per month 1.5 lb per month Answer: a. %change in price demanded: 0.15 − 0.25 −0.1 × 100% = × 100% = −50% 0.25+0.15 0.2 2 %change in quantity demanded: 400 − 300 100 × 100% = × 100% = 28.6% 300+400 350 2 Elasticity of demand 28.6% = 0.57 −50% b. %change in price demanded: 1.89 − 1.49 0.4 × 100% = × 100% = 33.6% 1.49+1.89 1.19 2 %change in quantity demanded: 12 − 14 −2 × 100% = × 100% = −15.38% 14+12 13 2 Elasticity of demand: −15.38% = 0.46 33.6% c. %change in price demanded: 1.00 − 2.89 −1.89 × 100% = × 100% = −97.42% 2.89+1.00 1.94 2 %change in quantity demanded: 6−3 3 × 100% = × 100% = 66.67% 6+3 4.5 2 Elasticity of demand: 66.67% = 0.68 −97.42% d. %change in price demanded: 12 − 9 3 × 100% = × 100% = 28.57% 9+12 10.5 2 %change in quantity demanded: 1.5 − 2 −0.5 × 100% = × 100% = 28.57% 2+1.5 1.75 2 Elasticity of demand: 28.57% =1 28.57%