Solution for problem set 2

Q1.

$ &' $ &' %
𝑄 = , differentiating both sides w.r.t. P, = − ) . 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 = . = −1
% &% % &% '

Note that for this demand curve, price elasticity of demand does not depend upon the values of P and Q.

Q2.

a) Plug-in the values for T and R in supply and demand equations, equate supply Qs and Qd and solve for
P* and Q*. P = 12, Q = 46.

F'
b) 𝑄& = 90 − 2𝑃 − 2𝑇. 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑡𝑖𝑛𝑔 𝑏𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠 𝑤. 𝑟. 𝑡. 𝑃, = −2.
F%
Therefore, price elasticity of demand = -2*(12/46) = -0.5217.

F' NO
Similarly, 𝑄G = −9 + 5𝑃 − 2.5𝑅, = 5. 𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒, 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 = 5 ∗ = 1.3043
F% PQ

c) This time, we shall differentiate the demand equation w.r.t. price of Titanium, T.

𝑄& = 90 − 2𝑃 − 2𝑇. 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑡𝑖𝑛𝑔 𝑏𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠 𝑤. 𝑟. 𝑡. 𝑇,

𝜕𝑄 𝜕𝑄 𝑇 10
= −2. 𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒, 𝑐𝑟𝑜𝑠𝑠 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 = ∗ = −2 ∗ = −0.4348
𝜕𝑇 𝜕𝑇 𝑄 46

The sign of the cross price elasticity of demand indicates that when price of Titanium goes up, demand for
golf balls goes down, i.e. they are demand complements to each other.

Q3.

QYX = 10,000 - 100(300) + 99(300)

QYX = 9700.
Y'[ %[
Using PU = 300 and QYX = 9700 gives the price elasticity of demand for United = . =
Y%[ '[
\]]
−100 = −3.09
^_]]
b)Market demand is given by 𝑄 & = 𝑄`& + 𝑄a& ,
𝑜𝑟, 𝑄 & = 10,000 − 100𝑃a + 99𝑃` + 10,000 − 100𝑃` + 99𝑃a
𝑜𝑟, 𝑄 & = 20,000 − 𝑃` − 𝑃a

Since both airlines charge same price, we can write:

𝑄 & = 20,000 − 2𝑃

&' b % \]]
For P = 300, Q = 19,400. Therefore, market-level price elasticity of demand = ∗ = −2 ∗ =
&% ' N^,P]]
−0.0309.
Q4.

a) 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 ℎ𝑖𝑟𝑖𝑛𝑔 𝑂𝑙𝑎 𝐶𝑎𝑏 = 𝑎 + 𝑝𝑟𝑖𝑒 𝑜𝑓 ℎ𝑖𝑟𝑖𝑛𝑔 𝑢𝑏𝑒𝑟 𝑐𝑎𝑏 − 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠𝑚𝑎𝑟𝑡 𝑝ℎ𝑜𝑛𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒

b) Ola cabs and Uber cabs are demand substitutes, since everything else remaining constant, when price of
hiring Uber cab increases, its demand decreases and demand for Ola cabs increases.

c) Ola cabs and smart phones are demand complements, since everything else remaining constant, when
price of smart phones increases, its demand decreases and subsequently demand for Ola cabs also decreases.