The slides for this (as well as the previous two) tutorial(s) are
available on Thursday on my (very primitive) web page:
http://www.sfu.ca/~haiyunc/
Chapter 4. Q24
Prior to unleaded gasoline, all cars used leaded gas, with the more
expensive gas containing more lead. In an eort to mitigate
pollution, a tax of $.10/gallon was placed on all gas in the hope to
reduce gas consumption and thus lower pollution. Can we say,
unambiguously, that such a tax would lower pollution from leaded
gas? Why or Why not?
There are two opposing eects
Tax increases price
quantity demanded drops (law of
demand)
Same amount of tax applies to both qualities of leaded gas
relative price of the more expensive (and more polluting) gas is
lower
substitution towards to more polluting gas
Net outcome depends on the relative magnitude of the two
eects, and so is ambiguous
a priori.
Chapter 4. Q28
Does the fact that garbage men make more money than the
average high school teacher mean that society values garbage
removal more than education? If not, what does it mean?
No. Salary is not a good estimate of
total value
It just means that the garbage man is more valuable than the
average high school teacher
at the margin
Chapter 4. Q38
Since the introduction of low fat foods, obesity rates have
increased greatly. Given that low fat foods are healthier per unit of
calorie compared to the high fat ones, how do you explain, using
law of demand, the rise in obesity as a rational response to the
consumption of low fat foods?
If low fat food is healthier per unit of calorie, then the (health)
cost of consuming low fat food is lower (than the high fat
ones)
By law of demand, a fall in the price/cost per calorie results in
an increase in quantity of calories consumed
Therefore, more calories consumed leads to obesity
Chapter 5. Q2
True or False: The quantity demanded can change, even though
the demand has not changed, but if the demand changes, then the
quantity demanded must also change.
Fix a demand curve,
changing price would
lead to changes in
quantity demanded
Change a demand
(curve), then quantity
demanded would also
change for any given
price level
Chapter 5. Q2
change in quantity demanded = movement along the
demand curve
e.g. changes from
Q0
to
Q1
, or from
Q0
to
Q1
, or vice versa
change in demand = shift/rotation of demand (curve)
e.g. changes from
to
, or vice versa
Chapter 5. Q10
True/False/Uncertain: The demand to view the
Mona Lisa
painting is completely inelastic because there is only one, and the
artist is long dead.
Uncertain.
From the fact that there is only one
Mona Lisa painting, we
cannot infer anything about elasticity
Remember that elasticity depends on the nature of the
substitutes, which in this case is not clear
Chapter 5. Q22
From the fact that the movie industry earned higher revenues in
recessions, what can we say about the overall income elasticity for
the demand for movies?
Movies must be an
inferior good
Goods with inverse relationship between income and quantity
demanded
Thus, the income elasticity for movies must be negative
Given the answer to the previous question, why, do you think,
better movies are made during recessions?
This can be caused by the demanders: when times are good,
people can aord more expensive means of entertainment,
thus a low demand for movies with good intellectual contents.
The situation reverses when times are not so good.
Chapter 5. Q24a
Suppose demand curve for good
is given by
Qx = 60 2Px + 0.5Py 0.1M
a. If
Py = 10 and M = 100, graph the demand curve.
Note that the demand curve becomes
Qx =
60
60
55
2Px + 0.5 10 0.1 100
2Px + 5 10
2Px
Two useful values in plotting the (linear) demand curve:
Px = 0
Qx = 0
Qx = 55
Px = 27.5
vertical intercept
horizontal intercept
Chapter 5. Q24a Plotting Demand Curve
It is customary in economics to plot the
Qx = 55 2Px
1. draw the axes,
P on vertical axis,
Q on horizontal axis
2. identify the vertical
and horizontal
intercepts
3. use a straight line to
connect the two
intercepts
inverse demand
Px = 27.5 0.5Qx
Chapter 5. Q24a
Px = 20 and Px = 10.
Px = 20, quantity demanded is
Qx = 55 2 20 = 15
For Px = 10, quantity demanded is
Qx = 55 2 10 = 35
a. (cont'd) Show quantities demanded for
For
Calculate own price arc elasticity over the price range.
1
0
1
Qx
2 (P + Px )
1 x
0
1
Px
2 (Qx + Qx )
0.5(20 + 10)
= 2
0.5(15 + 35)
Exx =
= 2
15
25
= 30/25
= 6/5
= 1.2
Chapter 5. Q24b
b. Assume that
Px = 10 and M = 100.
Suppose
to 20. Calculate the cross price elasticity for
For
Py = 10, quantity demanded is
x.
Py
goes from 10
Qx = 60 20 + 0.5 10 10 = 35
For
Py = 20, quantity demanded is
Qx = 60 20 + 0.5 20 10 = 40
Cross price elasticity for
Exy =
Are
and
is
1
0
1
Qx
2 (Py + Py )
1 0
= 0.5
1
Py
2 (Qx + Qx )
15
37.5
complements or substitutes?
Substitutes, since cross price elasticity is positive.
= 0.2
Chapter 5. Q24c
Px = Py = 10, and income changes from 100 to 200.
Calculate the income elasticity of demand for good x .
For M = 100, quantity demanded is
c. Assume
Qx = 60 20 + 5 0.1 100 = 35
For
M = 200, quantity demanded is
Qx = 60 20 + 5 0.1 200 = 25
Income elasticity is
ExM =
Is
1
(M 0 + M 1 )
Qx
2 0
= 0.1
1
1
M
2 (Qx + Qx )
a normal or inferior good?
Inferior, because income elasticity is negative
150
30
= 0.5
Chapter 5. Q28
Let demand for good
be
Qx = 100 2Px + Py 0.5M
Px = 2, Py = 5, and M = 100.
Suppose Px jumps to 4. Calculate elasticity of demand.
Qx (Px = 2) = 51 and Qx (Px = 4) = 47, thus
Suppose
a.
Exx = 2
b. Are
and
49
0.122
complements or substitutes?
Substitutes, because
c. Is
Py Qx
normal or inferior?
Inferior, because
M Qx
A trick for b and c: check the signs of the corresponding terms
Chapter 5. Q30
In 2010, the price of Sockeye salmon fell from $5 per pound to $1
per pound, due to an unexpected increase in its supply from 1
million to 30 million, compared to 2009.
a. Assuming that 30% of the salmon were caught (and sold) each
year, calculate the arc price elasticity.
P = 5 and Q = 0.3 million
In 2010, P = 1 and Q = 9 million
In 2009,
Q = 0.39 = 8.7
Pavg price 1
5
4
3
avg quantity
4.65
Exx =
8.7
4
3
4.65
1.4
b. Do you think local shermen were happier in 2010?
Yes,
Exx < 1 means total revenue is on the rise, and the
increase in quantity demanded is more than the drop in price
in percentage terms
