ME Problem Set-III

PGP 2019 - 21

1. Much of the demand for U.S. agricultural output has come from other countries. In
2014, the demand for wheat was 𝑄 = 3244 − 283𝑃. Of this, total domestic demand
was 𝑄 = 1700 − 107𝑃, and domestic supply was 𝑄 = 1944 + 207𝑃. Suppose the
export demand for wheat falls by 40 percent.
(a) U.S. farmers are concerned about the drop in export demand. What happens to the
free-market price of wheat in the United States? Do the farmers have much reason
to worry?
(b) Now suppose the U.S. government wants to buy enough wheat to raise the price to
$3.50 per bushel. With the drop in export demand, how much wheat would the
government have to buy? How much would this cost the government?

2. The director of a theatre company in a small college town is considering the way he
prices tickets. He has hired an economic consulting firm to estimate the demand for
tickets. The firm has classified people who go to the theatre into two groups and has
come up with two demand functions. The demand curves for the general public(𝑄 )
and students(𝑄 ) are given below:
𝑄 = 500 − 5𝑃
𝑄 = 200 − 4𝑃
(a) If the current price of tickets is $35, identify the quantity demanded by each
group.
(b) Find the price elasticity of demand for each group at the current price and
quantity.
(c) Is the director maximizing the revenue he collects from ticket sales by charging
$35 for each ticket?
(d) What price should he charge each group if he wants to maximize revenue
collected from ticket sales?

3. Suppose that the market for air travel between Chicago and Dallas is served by just
two airlines, United and American. An economist has studied this market and has
estimated that the demand curves for round-trip tickets for each airline are as follows:
𝑄 = 10000 − 100𝑃 + 99𝑃 (United’s demand); 𝑄 = 10000 − 100𝑃 +
99𝑃 (American’s demand) where 𝑃 is the price charged by the United, and 𝑃 is the
price charged by American.
(a) Suppose that both American and United charge a price of $300 each for a round-
trip ticket between Chicago and Dallas. What is the price elasticity of demand for
United flights between Chicago and Dallas?
(b) What is the market-level price elasticity of demand for air travel between Chicago
and Dallas when both airlines charge a price of $300?

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4. Ms. Pampered consumes only two goods, pizza (P) and burgers(H) and considers
them to be perfect substitutes, as shown by her utility function: 𝑈(𝑃, 𝐻) = 𝑃 + 4𝐻.
The price of pizza is $3 and the price of burgers is $6, and Ms. Pampered’s monthly
income is $300. Knowing that she likes pizza,her grandmother gives her a birthday
gift certificate of $60 redeemable only at Pizza Hut. Though Ms. Pampered is happy
to get this gift, her grandmother did not realize that she could have made her exactly
as happy by spending far less than she did. How much would she have needed to give
her in cash to make her just as well off as with the gift certificate?

5. In February, 20111, there was an unexpected temporary surge in the demand for
notebook hard drives, increasing the monthly demand for hard drives by 25 percent at
any possible price. As a result of this, the price of notebook hard drives increased by
$5 per megabyte by the end of February. This surge in demand ended in March,
20111, and the price of notebook hard drives fell back to its level just before the
demand surge occurred.
Later that year, in August 2011, an increase in the demand for notebook computers
occurred, increasing the monthly demand for hard drives by 25 percent per month at
any possible price. Nine months later, the price of notebook hard drives had increased,
by $1 per unit.
In both circumstances, the market experienced a shift in demand of exactly the same
magnitude. Yet, the change in the equilibrium price appears to have been different.
Why ?