Hk 5 Solutions 19454o

Name:_____Solutions_____ SE201: PRINCIPLES OF MICROECONOMICS Assignment 5: Due Wednesday 9/23/15  

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Make sure you show your work and that ALL answers are complete and neatly  written. Only work that follows these instructions and represents a “Good Faith Effort” to  answer the questions posed will receive a check. (Copying answers from a classmate  without working through the problems is unacceptable conduct). Stop by during my office hours (MW period 5, 6) if you have questions, or set up  another time to meet with me.

Read Chapters 4 and 5 of your textbook. Answer the following questions that cover supply, demand, and price elasticity. 1. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: Price $150 $200 $250 $300

Quantity Demanded (business travelers) 2,100 tickets 2,000 tickets 1,900 tickets 1,800 tickets

Quantity Demanded (vacationers) 1,000 tickets 800 tickets 600 tickets 400 tickets

a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? For business travelers, the price elasticity of demand when the price of tickets rises from $200 to $250 is [(2,000 – 1,900)/1,950]/[(250 – 200)/225] = 0.05/0.22 = 0.23. For vacationers, the price elasticity of demand when the price of tickets rises from $200 to $250 is [(800 – 600)/700] / [(250 – 200)/225] = 0.29/0.22 = 1.32. b. Why might vacationers have a different elasticity from business travelers? The price elasticity of demand for vacationers is higher than the elasticity for business travelers because vacationers can choose a substitute more easily than business travelers. For example, vacationers can choose a different mode of transportation (like driving or taking the train), a different destination, a different departure date, and a different return date. They may also choose to not travel at all. Business travelers are less likely to do so because their schedules are less adaptable.

2. Assume the U.S. corn market is perfectly competitive and the yearly (inverse) market demand for corn is approximated by: P  11  0.2Q

where P is the price per bushel, and Q is the total yearly quantity demanded (in billions of bushels). The inverse supply of corn is given by: P  1  0.3Q

Given the information above, answer the following questions: a) Calculate the price elasticity of demand at P = $9, Q = 10. Is demand price elastic, price inelastic, or unit elastic at this point? Price elasticity of demand 

P 1 9 1 *  *  4.5 Q slope 10 0.2

Demand is price elastic at this point. b) Calculate the price elasticity of supply at P = $4, Q = 10. Is supply price elastic, price inelastic, or unit elastic. Price elasticity of supply 

P 1 4 1 *  *  1.33 Q slope 10 0.3

Supply is price elastic at this point. c) Sketch the (inverse) demand and supply curves and calculate the free market competitive equilibrium price and quantity of corn in this market. Set the right-hand-side of the supply and demand equations equal and solve for Q e. 11 – 0.2Q = 1 + 0.3Q 10 = 0.5Q QE = 20 billion bushels PE = (11 – 0.2*20) = $7 per bushel