Reference no: EM131431157

Assignment

1. Draw and Find the Equilibrium. The following table shows the quantities of corn supplied and demanded at different price levels.

a.

1.) Use the line drawing tool to draw and label the demand line given the information in the table above.

2.) Use the line drawing tool to draw and label the supply line given the information in the table above..

Carefully follow the instructions above, and only draw the required objects.

b. The equilibrium price of corn is $ __________, and the equilibrium quantity is ______ tons.

(1). Demand
Supply

c. At a price of $150, there is excess (1) ________ equal to _______ tons.

(1) demand supply

2. Willie's widgets currently sell for $20 each. At that price, Willie has sold 36,000 widgets. Willie would like to maximize his revenue, so he raises the price of a widget to $22 each. Willie has seen the sales of his widgets drop only slightly to 34,000. Using the initial-value method, the price elasticity of demand for Willie's widgets is _____.

We can conclude that the demand for Willie's widgets under these conditions is

A. elastic.
B. perfectly inelastic.
C. unit elastic.
D. inelastic.

3. Income and the Price Elasticity of Demand for Medical Care. Like many other developing nations, Peru subsidizes medical care, charging consumers a small fraction of the cost of providing services such as visits to medical clinics. The price elasticity of demand for medical care is 0.67 for poor households but only 0.03 for wealthy households.

Suppose the government reduced its subsidies for medical care, and the price to consumers increased by 20 percent. The changes in the quantity of medical care demanded for poor households would be _____ percent and _____ percent for wealthy households.

4. Income and Starbucks Coffee Shops. Starbucks just hired you to determine whether your city could support a new Starbucks coffee shop. There are currently four Starbucks coffee shops in the city, and each has just enough customers to survive. The average household income in the city is expected to increase by 10 percent per year for the next 20 years.

Suppose the income elasticity for Starbucks coffee products is 1.25 and the population is assumed to be constant.

a. By what percentage will demand for Starbucks coffee products increase each year based on income growth?

A. 125%.
B. 1.25%.
C. 12.5%.
D. 8.0%.

b. How soon will the area have enough demand to support a fifth Starbucks?

A. 1 year.
B. 12 years.
C. 8 years.
D. 2 years.

5. Related to Application:

According to the USDA web site (https://www.ers.usda.gov/Data/Elasticities/), the following are elasticities for conventional broccoli in the U.S.:

Own price elasticity of demand                      - 1.05
Income (expenditure) elasticity of demand        0.86
Cross price elasticity of demand                      0.27

If improved production techniques decreased the equilibrium price of conventional broccoli by 20%, the quantity of conventional broccoli demanded would (1) ______ by ______ percent.

The quantity of organic broccoli demanded would decrease by ________ percent.

(1) increase
decrease

1: Application

APPLYING THE CONCEPTS: Where do I find estimates of elasticities of demand?

Suppose you want to find estimates of the elasticities of demand (own price, income, cross-price) for orange juice. The U.S. Department of Agriculture has a web site that provides estimates of demand elasticities for hundreds of food products (from apples to yogurt) for dozens of countries (from Albania to Zimbabwe). Starting from (https://www.ers.usda.gov/Data/Elasticities/), you are four clicks away from the following estimates of demand elasticities for orange juice in the U.S.: income elasticity = 2.212; own price elasticity = -1.391; cross-price elasticity for apple juice = 0.908. Here are the clicks: (1) Demand Elasticities from Literature; (2) Choose Country; Choose Commodity; (3) Cross Commodity; (4) Submit.

It's important to note two things about the reported elasticities. First, the regular price elasticity is reported as a negative number and labeled "own price elasticity" for "Marshallian Demand." Second, the reported "expenditure elasticity" is similar to the income elasticity, with the denominator of the elasticity equal to the percentage change in total consumer expenditure (versus percentage change in income).

6. Related to Application: Vanity Plates and the Elasticity Of Demand

Elasticity and Vanity Plates. Suppose the price elasticity of demand for vanity plates in your state is 0.80. The initial price is $25 and the initial quantity is 1,600 plates per week. Suppose the state decreases the price by 8 percent.

a. What will be the new number of vanity plates sold per week? ______ plates.

What will be the new total revenue per week? $ _______

b. The decrease in price (1) ______ total revenue because demand is (2) ___________.
(1) decreases
increases

(2) decreases
increases

2: Application

VANITY PLATES AND THE ELASTICITY OF DEMAND

APPLYING THE CONCEPTS: If demand is inelastic, how does an increase in price affect total expenditures?

The radio quiz show Wait Wait...Don't Tell Me! recently asked the following question: Which state has the highest number of vanity license plates? The correct answer is Virginia, where over 10 percent of cars have vanity license plates such as 10SNE1 and GLBLWRMR. An economist might have extended the question to ask why there are so many vanity plates in Virginia. Although Virginians may be unusually vain, a more plausible explanation is that the price of vanity plates is only $10, or about one third of the average price in the United States.

Is the low price in Virginia rational from the state's perspective? Suppose the state's objective is to maximize the revenue from vanity plates. According to a recent study, the demand for vanity plates in Virginia is inelastic, with a price elasticity of demand equal to 0.26. Therefore, if the state increased the price, the total revenue from vanity plates would increase.

SOURCE: Based on Erik Craft, "The Demand for Vanity (Plates): Elasticities, Net Revenue Maximization, and Deadweight Loss." Contemporary Economic Policy 20 (2002): 133 - 144.