Econ 101

Introduction to Microeconomics
E. Choi

ASSIGNMENT 2
1. The following table shows the demand schedule for video games.
Quantity
Price Demanded Total
(per unit) (per year) Expenditure
A $30 400 000
B 35 380 000
C 40 350 000
D 45 320 000
E 50 300 000
F 55 260 000
G 60 230 000
H 65 190 000

a. Compute the total expenditure for each row in the table.

b. Compute the price elasticities of demand between A and B, C and D, E and F, and G and H.

2. Suppose the market for frozen orange juice is in equilibrium at a price of $2.00 per can and a quantity of 4200 cans per
month. Now suppose that at a price of $3.00 per can, quantity demanded falls to 3000 cans per month and quantity
supplied increases to 4500 cans per month.
a. Calculate the price elasticity of demand for frozen orange juice between the prices of $2.00 and $3.00. Is demand
elastic or inelastic?
b. Calculate the price elasticity of supply for frozen orange juice between the prices of $2.00 and $3.00. Is supply
elastic or inelastic?

3. For each of the following events, state the relevant elasticity concept. Then compute the measure of elasticity, using
average prices and quantities in your calculations. In all cases, assume that these are ceteris paribus changes.
a. When the price of movie tickets is reduced from $14.00 to $11.00, ticket sales increase from 1200 to 1350.
b. As average household income in Canada increases by 10 percent, annual sales of BMWs increase from 56 000 to
67 000.
c. After a major failure of Brazil’s coffee crop sent coffee prices up from $3.00 per kilogram to $4.80 per kilogram,
sales of tea in Canada increased from 7500 kg per month to 8000 kg per month.
d. An increase in the world demand for pulp 9used in producing newsprint) increases the price by 14 percent. Annual
Canadian production increases from 8 million tonnes to 11 million tonnes.
e. Marta increases her purchases of organic fruits and vegetables from 40 kilos per year to 80 kilos per year as her
income rises from $60 000 to $69 000 per year.
f. When private school tuition fees increased from an average of $17 500 per year to $22 500 per year, schools
recorded a drop in annual enrollment from 12 000 students to 8000 students.

4. The demand for Apples (Qa) is given by Qa = 100 - 1Pa + .5Pb - 0.01I, where Pa is the price of Apples, Pb is the price
of Bananas, and I is the income.
a. Calculate the price elasticity demand for Apples when Pa is between 2 and 3, Pb = 1, and I = 500. Is the demand
for Apples elastic, unit-elastic, or inelastic?
b. Calculate the cross-price elasticity demand for Apples when Pb is between 1 and 2, Pa = 2, and I = 500. Are
Apples and Bananas substitutes or complement goods?
c. Calculate the income elasticity demand for Apples when I is between 500 and 1,000, Pa = 2, and Pb = 1. Are
Apples normal or inferior goods?