1.

The demand equation of X is:

Qx = 4000 - 12.5 Px - 3.5 Py -0.75I, where I is income and Py is price of another good.
What is the relation between goods X and Y? What type of good is good X?

2. The Management of the Ironny Steel Company estimated the following elasticities of
demand for a special type of steel: |ep | = 2, eI = 1, exy = 1.5, where X is steel and Y refers
to aluminium. Next year, the firm is planning to increase the price of steel by 6 per cent.
The Management forecasts that income will grow by 4 per cent and price of aluminium
will fall by 2 per cent next year. If the sales of steel this year is 1200 tons, how much steel
does the company expect to sell next year?
3. Hirschey, Chapter 4, page 155
P4.1 The demand for personal computers can be characterized by the following point elasticities:
price elasticity= -5, cross-price elasticity with software= -4, and income elasticity=2.5. Indicate
whether each of the following statements is true or false, and explain your answer.
A price reduction for personal computers will increase both the number of units demanded and
the total revenue of sellers.--T
The cross-price elasticity indicates that a 5 percent reduction in the price of personal computers
will cause a 20 percent increase in software demand.--
Demand for personal computers is price elastic and computers are normal goods.
Falling software prices will increase revenues received by sellers of both computers and software.
A 2 percent price reduction would be necessary to overcome the effects of a 1 percent decline in
income.

4. P4.6. Ironside Industries, Inc., is a leading manufacturer of tufted carpeting under the
Ironside brand. Demand for Ironside’s products is closely tied to the overall pace of
building and remodeling activity and, therefore, is highly sensitive to changes in national
income. The carpet manufacturing industry is highly competitive, so Ironside’s demand is
also very price-sensitive.
During the past year, Ironside sold 30 million square yards (units) of carpeting at an average
wholesale price of $15.50 per unit. This year, household income is expected to surge from
$55,500 to $58,500 per year in a booming economic recovery.
Without any price change, Ironside’s marketing director expects current-year sales to soar to 50
million units because of rising income. Calculate the implied income elasticity of demand.
Given the projected rise in income, the marketing director believes that a volume of 30 million
units could be maintained despite an increase in price of $1 per unit. On this basis, calculate the
implied price elasticity of demand.
Holding all else equal, would a further increase in price result in higher or lower total revenue?

5. P4.8. The South Beach Café recently reduced appetizer prices from $12 to $10 for
afternoon “early bird” customers and enjoyed a resulting increase in sales from 90 to 150
orders per day. Beverage sales also increased from 300 to 600 units per day.
Calculate the price elasticity of demand for appetizers.
Calculate the cross-price elasticity of demand between beverage sales and appetizer prices.
Holding all else equal, would you expect an additional appetizer price decrease to $8 to cause
both appetizer and beverage revenues to rise? Explain.
Stiglitz, Chapter 4

• Hirschey Chapter 11, page 447

• P11.2. People of many different age groups and circumstances take advantage of part-time
employment opportunities provided by the fast-food industry. Given the wide variety of
different fast-food vendors, the industry is fiercely competitive, as is the unskilled labor
market. In each of the following circumstances, indicate whether the proposed changes in
government policy are likely to have an increasing, a decreasing, or an uncertain effect on
employment in this industry.
• Elimination of minimum wage law coverage for those working less than 20 hours per week.
• An increase in spending for education that raises basic worker skills.
• An increase in the employer portion of federally mandated FICA insurance costs.
• A requirement that employers install expensive new worker-safety equipment.
• A state requirement that employers pay 8 percent of wages to fund a new national health care
program.
P11.7. Each year, about 9 billion bushels of corn are harvested in the United States. The average
market price of corn is a little over $2 per bushel, but costs farmers about $3 per bushel. Tax
payers make up the difference. Under the 2002 $190 billion, 10 year farm bill, American
taxpayers will pay farmers $4 billion a year to grow even more corn, despite the fact that every
year the United States is faced with a corn surplus. Growing surplus corn also has unmeasured
environmental costs. The production of corn requires more nitrogen fertilizer and pesticides than
any other agricultural crop. Runoff from these chemicals seeps down into the groundwater supply,
and into rivers and streams. Ag chemicals have been blamed for a 12,000-square-mile dead zone
in the Gulf of Mexico. Overproduction of corn also increases U.S. reliance on foreign oil.
To illustrate some of the cost in social welfare from agricultural price supports, assume the
following market supply and demand conditions for corn:

Q S =−5,000+5,000 P

Q D=10,000−2,500 P
Q is output in bushels of corn (in millions), and P is the market price per bushel.
• Graph and calculate the equilibrium price-output solution. Use this graph to help you
algebraically determine the amount of surplus production the government will be forced to
buy if it imposes a support price of $2.50 per bushel.