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“Substitution effect of any commodity is positive for a given a price change”. Explain the validity of this statement using appropriate illustrations
You are an analyst employed by an airplane manufacturer that last year sold 40,000 ATR-72
aircrafts at $100,000 each. Your market research indicates that:
I. the price elasticity of demand for your aircrafts in −0.5. (or +0.5 in absolute value);
II. the income elasticity of demand for your aircrafts is +3.7; and
III. the cross price elasticity for your aircrafts with respect to the price of a comparable jet
manufactured by a competitor is +1.6.
A. Suppose that you expect a ceteris paribus decrease in average incomes of 10% this
year compared to last year. How many aircrafts do you estimate that your company will
sell this year? How will it impact total revenues? 6 mark
The price of compact disc players fell over the past decade because a combination of improving
technology, rising incomes, and falling prices of compact discs caused the
Assuming the supply function is given as: Qs=+5P Determine the quantity
supplied of fish in kilos at a given prices
Price of Fish (per Kilo) Supply (in kilos)
P 20
40
60
80
100
Illustration:
Given:
Required:
Solution:
If the supply curve is perfectly inelastic and a per-unit tax is imposed on consumers, will
there be a deadweight loss to society? Why or why not?
A per-unit tax imposed on suppliers will shift the supply curve up by the amount of the tax.
Illustrate the deadweight loss from the tax
After a late-winter freeze in Florida, the supply curve for early-season blueberries was estimated as: QS = - 500 + 5 000 P The demand curve for blueberries is:
QD = 19 000 – 1 500 P P : measured in dollars, Q : measured in pints
3) How much are consumers willing to pay for blueberries when this many pints of blueberries are sold? What is the maximum value of time consumers would be willing to spend waiting in line for blueberries?
4) Suppose that sellers of blueberries must spend $0.50 per pint to pick blueberries. The sellers try to evade the price ceiling by selling only U-pick blueberries. Consumers value U-pick pints of blueberries at 0.50 per pint less than picked blueberries because of the opportunity cost of picking time. If all blueberries sold are U-pick blueberries, how many pints of blueberries are sold?
4) What is the equilibrium price of U-pick blueberries?
5) Is the outcome in 4) more efficient than the outcome in 2)?
After a late-winter freeze in Florida, the supply curve for early-season blueberries was
estimated as: QS = - 500 + 5 000 P.The demand curve for blueberries is:
QD = 19 000 – 1 500 P
P: measured in dollars, Q: measured in pints
1) Before the freeze, the equilibrium price was $0.50 per pint. Find the equilibrium P and Q after the freeze
2) There is a price ceiling in place of $1.00 per pint. If there is no illegal trading, how many pints of blueberries will be sold?
Use diminishing marginal utility to explain why millionaires often do not have many homes, even if they can afford it
The world producer price for baseball is $24 per dozen, and almost all of them are produced
outside the United States. Suppose the U.S. demand curve and supply curves are:
QD = 100 000 – 2 000 P
QS = - 10 000 + 1 000 P
P : price per dozen
Q: dozens
1) Before a tariff is imposed, what is the U.S. equilibrium price? Domestic consumption?
Domestic production? imports?
2) Congress has decided to help the baseballmanufacturing industry by imposing a tariff of $ 6 per dozen. What are the new equilibrium price, domestic consumption, domestic production, and imports?
3) What are the losses to U.S. consumers, gains to U.S. producers, and deadweight loss? (Hint: The area of a trapezoid is [height] [ base 1 + base 2 ] / 2 where base 1 and base 2 are the parallel sides of the trapezoid.)
