Homework #2Lankford
Fall 2000ECO 110M
1. A fellow student is heard to say the following: “Economic markets are like perpetual see-saws. If supply increases, the price falls; if price falls, then supply will fall; if supply falls, then price will rise; if price rises, then supply will increase. If supply increases, …” Dispel your friend’s obvious confusion (in no more than one short paragraph) below.
2. The M. Fazima Tobacco Company currently can sell 9,500 boxes of cigarettes per week at a price of $1.20 per pack. If the price were $0.80 per pack, the company could sell 10,500. Calculate the price elasticity of demand for its cigarettes. Show your work and interpret you answer.
3. Your lecture notes state that the price elasticity of demand for gasoline is 1.4. Explain what this means.
4. A concert promoter has booked Phish to perform at the Pepsi Arena which has a seating capacity of 13,000. She has calculated that 4000 tickets would be sold if the ticket price were $45.00 and somehow knows that the price elasticity of demand for the concert is 0.7. If the promoter’s objective is to maximize revenues, should she charge more or less than $45.00 per ticket? Explain why.
5. Consider the market for some product, where D in the following diagram is the initial demand. Two supply curves are shown, characterizing two alternative situations. In both cases (i.e., with either supply curve), the initial equilibrium price would be $1.50.
- Calculate and contrast the price elasticities of supply for the two alternative supply curves associated with an increase in price from $1.50 to $2.50. At point z, which supply curve is relatively more elastic?
b. Using the above diagram, graph and explain the effect of an increase in demand. Use the two cases to analyze and explain whether the following statement is true or false. “The resulting increase in the equilibrium price due to the increase in demand will be smaller as the price elasticity of supply is smaller.”