Exercises: Supply, Demand, Elasticity (Based on Chapter 5, Problem 2 in your text). Suppose the demand for airline tickets from Istanbul to Vienna by business travelers and tourists is given in the Table below. a) As the price rises from 200 to 250, what is the elasticity of demand by business travelers and by tourists? b) Why might they be different? c) How might the airline take advantage of this? P Q Demanded By business Travelers Q Demand by Tourists 150 2100 1000 200 2000 800 250 1900 600 300 1800 400 Elasticity (from 200 to250)
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Exercises: Supply, Demand, Elasticity (Based on Chapter 5, Problem 2 in your text). Suppose the demand for airline
tickets from Istanbul to Vienna by business travelers and tourists is given in the Table below.
a) As the price rises from 200 to 250, what is the elasticity of demand by business travelers and by tourists?
b) Why might they be different?
c) How might the airline take advantage of this?
P Q Demanded By business Travelers
Q Demand by Tourists
150 2100 1000
200 2000 800
250 1900 600
300 1800 400
Elasticity (from 200 to250)
Exercises: Supply, Demand, Elasticity (Based on Chapter 5, Problem 2 in your text). Suppose the demand for airline
tickets from Istanbul to Vienna by business travelers and tourists is given in the Table below.
a) As the price rises from 200 to 250, what is the elasticity of demand by business travelers and by tourists?
b) Why might they be different?
Tourists can choose other destinations, or holiday at home.
a) How might the airline take advantage of this?
Price differentially.
Business Travelers Tourists
(1900-2000)*225/(250-200)*1950 (600-800)*225/(250-200)*700
= - 0.23 =-1.28
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 7 in your text) Studies have shown that the price elasticity of demand for cigarettes is about -0.4. Suppose the current price is 2 YTL. The government is considering taxing cigarettes to reduce smoking.
a. If the government wants to reduce smoking by 20%, how much should it increase the price?
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 7 in your text) Studies have shown that the price elasticity of demand for cigarettes is about -0.4. Suppose the current price is 2 YTL. The government is considering taxing cigarettes to reduce smoking.
a. If the government wants to reduce smoking by 20%, how much should it increase the price?
ε = %Δq / % Δp
therefore
% Δp = %Δq / ε = -20/0.4=50%
Exercises: Supply, Demand, Elasticity
(Cont’d). Delete the incorrect answer:
• If the price elasticity was -0.2, the same tax lead to a greater/smaller reduction in smoking, and would generate more/less revenue for government.
• If the price elasticity was -2, the same tax lead to a greater/smaller reduction in smoking, and would generate more/less revenue for government.
Exercises: Supply, Demand, Elasticity
(Cont’d). Delete the incorrect answer:
• If the price elasticity was -0.2, the same tax lead to a smaller reduction in smoking, and would generate more revenue for government.
• If the price elasticity was -2, the same tax lead to a greater reduction in smoking, and would generate less revenue for government.
Exercises: Supply, Demand, Elasticity
For Discussion:
• Would you expect the price elasticity of demand to be larger or smaller in the long run (relative to the short run)?
• Studies have also shown teenagers have a larger (more negative) price elasticity than adults. Why might this be true?
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 4 in your text) Suppose Seyda decides to always spend one third of her income on clothes.
a. Her income elasticity of demand for clothes is ____________.
b. Her price elasticity of demand for clothes is __________.
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 4 in your text) Suppose Seyda decides to always spend one third of her income on clothes.
a. Her income elasticity of demand for clothes is _____1_______.
b. Her price elasticity of demand for clothes is _____-1_____.
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 10 in your text) Houses on the Bosphorus have an inelastic supply (why?). Cars have an elastic supply. Suppose that growth in the population of Istanbul doubles demand (at every price) for both products. Delete the incorrect answer:
• The equilibrium price of cars will rise/fall.
• The equilibrium price of houses will rise/fall.
• The equilibrium quantity of cars will rise/fall.
• The equilibrium quantity of houses will rise/fall.
• Houses/cars will have the larger change in price.
• Houses/cars will have the larger change in quantity.
• Total consumer spending on cars will rise/fall.
• Total consumer spending on houses will rise/fall.
Exercises: Supply, Demand, Elasticity (Based on Chapter 5, Problem 10 in your text) Houses on the Bosphorus have
an inelastic supply (why?). Cars have an elastic supply. Suppose that growth in the population of Istanbul doubles demand (at every price) for both products.
P
Q
P
Q
Cars Houses
Exercises: Supply, Demand, Elasticity
(Based on Chapter 5, Problem 10 in your text) Houses on the Bosphorus have an inelastic supply (why?). Cars have an elastic supply. Suppose that growth in the population of Istanbul doubles demand (at every price) for both products. Delete the incorrect answer:
• The equilibrium price of cars will rise.
• The equilibrium price of houses will rise.
• The equilibrium quantity of cars will rise.
• The equilibrium quantity of houses will rise.
• Houses will have the larger change in price.
• Cars will have the larger change in quantity.
• Total consumer spending on cars will rise.
• Total consumer spending on houses will rise.
Exercises: Supply, Demand, Elasticity
For discussion (from chapter 5 in your text):
1. Can good news for farming be bad news for farmers?
2. Why did OPEC fail to keep the price of oil high in the 1980s?
3. Does drug prohibition increase or decrease drug-related crime?
Exercises: Welfare Economics (Chapter 7, Problems 3,4,5 in your text)
a. Derive Oliver’s demand schedule and graph his demand curve
b. If price is 4, how many would Oliver like to buy and how much consumer surplus would he get from this purchase?
c. If price fell to 2, how much would quantity demanded and consumer surplus change? Illustrate graphically.
Bottle Oliver’s Value Ben’s Cost
1 7 1
2 5 3
3 3 5
4 1 7
Exercises: Welfare Economics a. Derive Oliver’s demand schedule and graph his demand curve
b. If price is 4, how many would Oliver like to buy and how much consumer surplus would he get from this purchase?
c. If price fell to 2, how much would quantity demanded and consumer surplus change? Illustrate graphically.
Price Oliver’s Demand
Oliver’ Surplus
Ben’s Supply Ben’s Surplus
8
7
6
5
4
3
2
Exercises: Welfare Economics a. Derive Oliver’s demand schedule and graph his demand curve
b. If price is 4, how many would Oliver like to buy and how much consumer surplus would he get from this purchase?
c. If price fell to 2, how much would quantity demanded and consumer surplus change? Illustrate graphically.
Price Oliver’s Demand
Oliver’ Surplus
Ben’s Supply Ben’s Surplus
8 0 0
7 1 0
6 1 1
5 2 2
4 2 4
3 3 6
2 3 9
Exercises: Welfare Economics (Continued)
d. Derive Ben’s supply schedule and graph his supply curve.
e. If price is 4, how many would Ben like to sell and how much producer surplus would he get from this sale?
f. If price fell to 2, how much would quantity supplied and producer surplus change? Illustrate graphically .
Price Oliver’s
Demand Oliver’ Surplus
Ben’s Supply Ben’s Surplus
8 0 0
7 1 0
6 1 1
5 2 2
4 2 4
3 3 6
2 3 9
Exercises: Welfare Economics (Continued)
d. Derive Ben’s supply schedule and graph his supply curve.
e. If price is 4, how many would Ben like to sell and how much producer surplus would he get from this sale?
f. If price fell to 2, how much would quantity supplied and producer surplus change? Illustrate graphically .
Price Oliver’s Demand
Oliver’ Surplus
Ben’s Supply Ben’s Surplus
8 0 0 4 16
7 1 0 4 12
6 1 1 3 9
5 2 2 3 6
4 2 4 2 4
3 3 6 2 2
2 3 9 1 1
Exercises: Welfare Economics
(Continued)
g. If Ben and Oliver are the market, what is the equilibrium price?
h. What are consumer, producer and total surplus at the equilibrium price?
i. What would happen to consumer, producer and total surplus if Ben produced and Oliver bought one fewer units? One more unit?
Exercises: Welfare Economics
(Continued)
g. If Ben and Oliver are the market, what is the equilibrium price?
The equilibrium price is 4 (quantity 2)
h. What are consumer, producer and total surplus at the equilibrium price?
CS=4, PS=4, TS=8
i. What would happen to consumer, producer and total surplus if Ben produced and Oliver bought one fewer units? One more unit?
A 3rd unit at the equilibrium price would lower CS by one, lower PS by one, and lower TS by 2
Selling one less unit at equilibrium price would lower CS by one, lower PS by one, and lower TS by 2
Exercises: Welfare Economics
(Based on Chapter 8, Question 11 in your text.)
Suppose that a market is described by the following supply and demand curves:
QS=2P
QD=300-P
a. Solve for the equilibrium price and quantity.
b. How will at tax T on buyers affect the equilibrium?
c. Calculate the revenue this tax will raise.
d. Calculate the deadweight loss.
Exercises: Welfare Economics
(Based on Chapter 8, Question 11 in your text.)
Suppose that a market is described by the following supply and demand curves:
QS=2P
QD=300-P
a. Solve for the equilibrium price and quantity.
QS=QD
2P=300-P
P=100
Q=200
Exercises: Welfare Economics (Based on Chapter 8, Question 11 in your text.)
Suppose that a market is described by the following supply and demand curves:
QS=2P
QD=300-P
b. How will at tax T on buyers affect the equilibrium?
PD=Ps + T
QS=2PS
QD=300-PD=300-Ps-T
QS=QD=Q
2PS=300-Ps-T
PS=100-T/3
Pd=100+2T/3
Q=200-2T/3
Exercises: Welfare Economics
(Based on Chapter 8, Question 11 in your text.)
Suppose that a market is described by the following supply and demand curves:
QS=2P
QD=300-P
c. Calculate the revenue this tax will raise.
R=QT=(200-2T/3)T=200T-2T2/3
d. Calculate the deadweight loss.
DWL=0.5*ΔQ*T
=0.5*(2T/3)*T
=T2/3
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