Assignment 2

Due: Oct. 14th, 2019 at 4pm

1. Market research has revealed the following information about the market for chocolate bars: The
demand schedule can be represented by the equation QD=1600-300P, where QD is the quantity
demanded and P is the price. The supply schedule can be represented by the equation QS=1400+700P,
where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for
chocolate bars.

2. Please use demand and supply diagram to explain how the equilibrium price and equilibrium quantity
will change in the market for motorcycles if consumer preference for motorcycles increases and the
number of motorcycle manufacturers decreases. Please label your diagram clearly.

3. Suppose that your demand schedule for DVDs is as follows:

Price Quantity Demanded Quantity Demanded
(income = $10,000) (income = $12,000)
$8 40 DVDs 50 DVDs
10 32 45
12 24 30
14 16 20
16 8 12
a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases
from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000.
b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,000 if (i)
the price is $12 and (ii) the price is $16.

4. The New York Times reported (Feb.17, 1996) that Subway ridership declined after a fare increase:
“There were nearly 4 million fewer riders in December 1995, the first full month after the price of a
token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate, what happens to the Transit Authority’s revenue when the fare rises?
c. Why might your estimate of the elasticity be unreliable?

5. It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water:
Value of first bottle $7
Value of second bottle $5
Value of third bottle $3
Value of fourth bottle $1
a. From this information, derive Bert’s demand schedule. Graph his demand curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus
does Bert get from his purchases? Show Bert’s consumer surplus in your graph.
c. If the price falls to $2, how does quantity demanded change? How does Bert’s consumer surplus
change? Show these changes in your graph.

6. One of the largest changes in the economy over the past several decades is that technological advances
have reduced the cost of making computers.
a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus,
and producer surplus in the market for computers.
b. Forty years ago, students used typewriters to prepare papers for their classes; today they use
computers. Does that make computers and typewriters complements or substitutes? Use a supply-and-
demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in
the market for typewriters. Should typewriter producers have been happy or sad about the technological
advance in computers?
c. Are computers and software complements or substitutes? Draw a supply-and-demand diagram
to show what happened to price, quantity, consumer surplus, and producer surplus in the market for
software. Should software producers have been happy or sad about the technological advance in
computers?
d. Does this analysis help explain why software producer Bill Gates is one of the world’s richest people?