04 Jun Question Show all work and show all calculations.
Question
Show all work and show all calculations.
1. Suppose the relationship between Demand for good x (Qx) can be described by the following
linear relationship (Py: price of good y, I = income):
Qx= 300 – 10Px ? 6Py + 2 I
a) From the demand relationship above, you conclude: Goods X and Y are
substitute/complementary goods because_______________________, and an increase in Py
would cause the increase in quantity demanded/increase in demand for X. Show this on a graph
below.
b) From the demand relationship above, Good X is a normal/inferior good because
c) Suppose Py = $15 per unit, and I = $100, and Px = $10. At these prices and income, the price
elasticity of demand is equal to _______ and the cross price elasticity of demand is equal to
_______. Interpret these numbers.
d) From the computations in part c), you can say that demand for good X is elastic/inelastic. How
would a decrease in price of X affect expenditure (revenue) on good X, other things constant.
2. Suppose the demand and supply curves for basketballs are given by:
Qd = 200 – 5P
Qs = ?20 + 6P.
a) Using the demand and supply functions above, the equilibrium price of a basketball is ____, and
the equilibrium quantity is ____. Illustrate your answer.
b) Compute price elasticity of demand and supply at the equilibrium price and quantity. Price
elasticity of demand is equal to___ _ and price elasticity supply is equal to ____.
c) On the same graph above, show the effect on equilibrium price and quantity of a) an increase in
the price of rubber used to make basketballs, and b) changing preferences of kids to playing
more soccer.
d) From the demand and supply curves given above, compute CS, PS, and aggregate surplus.
Illustrate on Graph.
e) Government wants to increase its revenues. Legislators decide that they will impose an excise
tax of $3 per basketball on producers of basketball. Using the demand and supply curves above,
the new equilibrium price and quantity of Pizza’s would be _____, ______. The producers will
receive a net of tax price of ____. The government will collect total tax revenue of ______.
Illustrate your answer.
f) Define, in words, deadweight loss, and briefly explain why the excise tax causes a dead weight
loss. Compute deadweight loss (DWL). Illustrate DWL in the graph above.
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