ECON1101 Tutorial 3 PDF

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ANU Research School of Economics ECON1101 – Semester 2 2014

Tutorial Problem Set 3 Week 3 (beginning Monday 11 August) __________________________________________________________________________________ 1. Consider the market for mini-vans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply is increased or decreased. a. People decide to have more children. b. A strike by steelworkers raises steel prices. c. Engineer’s develop new automated machinery for the production of mini-vans d. The price of large (7-8 seater) 4WDs decreases. e. A stock market crash lowers people’s wealth 2. State whether each of the following events will result in a movement along the demand curve for Dominos pizzas or whether it will cause the curve to shift. Explain your answer. If the demand curve shifts, indicate whether it will shift to the left or the right and draw the graph to illustrate the shift. a. Pizza Hut reduces the price of their pizzas by $1. b. Early hard frosts around the country ruin many tomato crops, causing the price of tomatoes to rise. c. Dominos institutes a two-for-one pizza deal on Wednesday’s. d. Kingsley’s Chicken now offers a lower price of their chicken and chip meals. 3. The market for toothbrushes has the following demand and supply schedules: Price ($/toothbrush) Quantity Demanded (millions) Quantity Supplied (millions) 4 135 26 5 104 53 6 81 81 7 68 98 8 53 110 9 39 121 a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? If the actual price in this market were above the equilibrium price, what would derive the market toward equilibrium? If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium? b. As the price rises from $5 to $6, what is the price elasticity of demand for toothbrushes? 4. Recently in Canberra, ACTION buses increased the price of their bus fares. It was noted that in the month after the price had increased by 25 cents to $2.20 for a zone one ticket, there was a 4.3% decline in the number of zone one fares bought.

2 a. Use this information to estimate the price elasticity of demand for zone one ACTION bus rides. b. According to your estimate, what happens to the revenue when the fare rises? c. Why might your estimate of the elasticity be unreliable?

5. Sally’s demand equation for lipstick is qd = 3 +√ M – 4pd Where:

qd is the quantity of lipsticks per month; M is Sally’s disposable income ($/month); and pd is the price of a lipstick ($/lipstick).

a. Suppose Sally’s disposable income is initially $81 per week. Derive Sally’s demand equation and draw her demand curve. Make sure you label axes and intercepts b. Suppose the price of a lipstick is $1.50 each. How much will Sally be spending on lipsticks each month? Illustrate her expenditure on lipsticks in your diagram from (a). c. Sally gets a demotion at work and her disposable income falls to $64 per week. How will this affect her demand for lipsticks? Explain and carefully illustrate this on your graph. d. Calculate the income elasticity of Sally’s demand for lipsticks (when her disposable income changes from $81 per week to $64 per week). Does Sally consider lipsticks to be a “luxury” good? Explain....