PS3 - Econ 101 - Econ 101 Problem Set Practice PDF

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Econ 101 Problem Set Practice ...

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Econ 101 Winter 2019 Problem Set 3 1) In the United States, 2007 was a bad year for growing wheat. As the wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). In 2006: Quantity demanded of wheat was 2.2 billion bushels and average price was $3.42 per bushel. In 2007: Quantity demanded was 2.0 billion bushels and average price was $4.26 per bushel. a. Use the midpoint method to calculate the price elasticity of demand for wheat. b. What was the total revenue for U.S. wheat farmers in 2006 and 2007? c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a? 2) A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand = -2.0 Income elasticity of demand = 1.5 Based on this information, are the following statements true or false? Explain your reasoning. a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b. An increase in consumer income will increase the price and quantity of Beetles sold, however, since the price elasticity of demand for the good is -2.0, making the good elastic, total revenue will go down. 3) Why do business travelers pay more? Consider the following information regarding airline travel for both vacation travelers and business travelers. Assume that the airline increases the price of a ticket from $200 to $220. Vacation Travelers Price Quantity Demanded 200 10,000 220 8,000

Business Travelers Price Quantity Demanded 200 10,000 220 9,500

a. Calculate the price elasticity of demand for vacation travelers and for business travelers using the Midpoint formula. b. For vacation travelers, calculate total revenue both before and after the price change. Did total revenue rise or fall as a result of the price change? Is this what you expected based on the elasticity you calculated in part (a)? Use the concepts of price effect and quantity effect to help explain your answer. c. For business travelers, calculate total revenue both before and after the price change. Did total revenue rise or fall as a result of the price change? Is this what you expected based on the elasticity you calculated in part (a)? Use the concepts of price effect and quantity effect to help explain your answer. d. Based on your answers, what would you expect the airlines to attempt to do regarding the price they charge vacation travelers and business travelers?

4) The price of Milk drops from $1.50 to $1.00 per gallon and the quantity demanded goes from 100,000 to 200,000 gallons. Use the midpoint method to find the price elasticity of demand for milk. 5) Would you expect the demand for the following to be elastic or inelastic? Rank the goods in order of increasing elasticity (answers may vary): a. A Starbuck’s brand double-tall skinny latte b. A caffeinated drink (such as coffee, mocha, etc) c. A latte d. A decaffeinated drink. 6) Would you expect the demand for the following to be income elastic, income inelastic, or have a negative income elasticity? Rank the following items by their income elasticities, from high income elasticity to negative income elasticity (Answers may vary). a. Bus trips b. Eggs c. New home d. New car e. Used car f. Restaurant meals g. Margarine 7) The accompanying table shows the price and yearly quantity sold of gasoline in the town of Jackson City according to the average income of the citizens of the town.

Price of gasoline per gallon $3 4 5 6

Quantity of gasoline demanded in gallons when average income is $30,000 30,000 27,000 24,000 21,000

Quantity of gasoline demanded in gallons when average income is $50,000 40,000 37,000 34,000 31,000

a. Suppose that, initially, the market clearing price for gasoline is $6 per gallon and the average income in Jackson City is $30,000. If the average income increases to $50,000 per year, what happens to the demand curve for gasoline in Jackson City? Use a graph to illustrate your answer. Briefly explain your reasoning. b. Using the midpoint method, calculate the income elasticity of demand when the price of a gasoline is $6 per gallon and the average income increases from $30,000 to $50,000. Is the income elasticity of demand for gasoline in Jackson City elastic or inelastic over this range?...