Chapter 3

Exercise 1: At Q = 5, P = 10, price elasticity of demand is -0.5. Derive the linear

demand function.

Exercise 2: An increase in the price of oranges from 10,000 VND/ kg to 15,000

VND/kg causes a decrease in the quantity demanded from 800 kg to 400 kg. Calculate
the price elasticity of demand.

Exercise 3: The market demand and supply function of good A are as followed:

P = -2Q + 100; P = 2Q + 40 with P ($/kg) và Q(kg)

a. Determine the equilibrium.

b. Calculate price elasticity of supply and demand at the equilibrium.
c. Suppose that the government imposes a tax on seller t =2$/kg. Find the new
equilibrium. What happens to the price received by sellers, the price paid by buyers,
and the quantity sold? Determine the tax incidence.
d. If the government impose a new tax and this tax leads to a decrease by 10% in
quantity demanded at each price. Solve for the new equilibrium. Calculate the
tax burden on buyers and the tax burden on sellers.

Exercise 4: The market demand and supply function of good A are as followed:

P = -aQ + b; P = cQ + d with P ($/kg) và Q(kg), a>0, c>0

a. Determine the equilibrium

b. Calculate price elasticity of supply and demand at the equilibrium.

c. Suppose that the government impose a tax on seller t $/kg. Find the new
equilibrium. What happens to the price received by sellers, the price paid by buyers, and the
quantity sold? Determine the tax incidence.

Exercise 5: Mike has the demand function for good X as followed

QD = -3PX + 5PY – I + 41

a. At Px = 2, PY = 3, I = 10, calculate price elasticity of demand, income elasticity

of demand and cross price elasticity of demand for good X
b. What is the relationship between good X and good Y? Why?
c. Is X a normal or inferior good? Why?