Q: Calculate the own price elasticity of demand at $$P = 25$$ for the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, given $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600.$$

$$OPE = (dQD/dP) \times (P/QD) = -2 \times (25/86.7) \approx -0.58$$

Q: Given the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, calculate the income elasticity of demand when $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600$$, $$P = 25.$$

$$IE = (dQD/dI) \times (I/QD) = 0.3 \times (85/86.7) \approx 0.29$$

Q: Given $$Qd_{gas} = 0.02 - 1.8P_{gas} + 0.69P_{oil}$$, calculate the cross price elasticity of demand for gas with respect to oil when $$P_{oil} = 50$$ and $$P_{gas} = 3.$$

$$CPE = 0.69 \times (50/Qd_{gas}). $$First, $$Qd_{gas} = 0.02 - 1.8(3) + 0.69(50) = 0.02 - 5.4 + 34.5 = 29.12. So$$, $$CPE = 0.69 \times (50/29.12) \approx 1.18$$

Q: Calculate the supply elasticity at $$P = 10$$ and $$W = 10$$ for the supply equation $$QS = 25 + 3P - 0.1W.$$

$$SE = (dQS/dP) \times (P/QS) = 3 \times (10/(25 + 3(10) - 0.1(10))) = 3 \times (10/54) \approx 0.56$$

Question 1

Which of the following best describes the law of demand?

Accepted Answer

As the price of a good increases, the quantity demanded decreases, ceteris paribus.

Question 2

Given the demand equation for used cars: $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, what is the predicted quantity demanded when $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600$$, and $$P = 25$$?

Accepted Answer

$$QD = 100 + 0.3(85) + 0.4(40) - 0.008(600) - 2(25) = 100 + 25.5 + 16 - 4.8 - 50 = 86.7$$

Question 3

If the coefficient on income in the demand equation for used cars is positive, what type of good are used cars?

Accepted Answer

A normal good

Question 4

Given the supply equation $$QS = 25 + 3P - 0.1W$$, what is the quantity supplied when $$P = 25$$ and $$W = 50$$?

Accepted Answer

$$QS = 25 + 3(25) - 0.1(50) = 25 + 75 - 5 = 95$$

Question 5

What happens to the equilibrium price and quantity if both demand and supply increase simultaneously?

Accepted Answer

Equilibrium quantity increases, but the effect on equilibrium price is ambiguous.

Question 6

Calculate the own price elasticity of demand at $$P = 25$$ for the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, given $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600.$$

Accepted Answer

$$OPE = (dQD/dP) 	imes (P/QD) = -2 	imes (25/86.7) \approx -0.58$$

Question 7

If the own price elasticity of demand is less than 1 in absolute value, what does this imply about total revenue when price increases?

Accepted Answer

Total revenue increases.

Question 8

Given the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, calculate the income elasticity of demand when $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600$$, $$P = 25.$$

Accepted Answer

$$IE = (dQD/dI) 	imes (I/QD) = 0.3 	imes (85/86.7) \approx 0.29$$

Question 9

If the income elasticity of demand for used cars is positive but less than 1, what does this indicate?

Accepted Answer

Used cars are a normal good and a necessity.

Question 10

Given $$Qd_{gas} = 0.02 - 1.8P_{gas} + 0.69P_{oil}$$, calculate the cross price elasticity of demand for gas with respect to oil when $$P_{oil} = 50$$ and $$P_{gas} = 3.$$

Accepted Answer

$$CPE = 0.69 	imes (50/Qd_{gas}). $$First, $$Qd_{gas} = 0.02 - 1.8(3) + 0.69(50) = 0.02 - 5.4 + 34.5 = 29.12. So$$, $$CPE = 0.69 	imes (50/29.12) \approx 1.18$$

Question 11

If the cross price elasticity of demand between gas and oil is positive, what does this imply?

Accepted Answer

Gas and oil are substitutes.

Question 12

Calculate the supply elasticity at $$P = 10$$ and $$W = 10$$ for the supply equation $$QS = 25 + 3P - 0.1W.$$

Accepted Answer

$$SE = (dQS/dP) 	imes (P/QS) = 3 	imes (10/(25 + 3(10) - 0.1(10))) = 3 	imes (10/54) \approx 0.56$$

Question 13

If supply is more elastic than demand, who bears more of the burden of a tax imposed on a good?

Accepted Answer

Consumers bear more of the burden.

Question 14

What is consumer surplus?

Accepted Answer

The difference between the maximum price a consumer is willing to pay and the actual price paid.

Question 15

If a price floor is imposed above the equilibrium price, what happens to consumer surplus?

Accepted Answer

Consumer surplus decreases.

Question 16

What is the formula for producer surplus in a market?

Accepted Answer

The area above the supply curve and below the market price.

Question 17

If the government imposes a tax on a good with inelastic demand, what is the likely effect on consumer and producer surplus?

Accepted Answer

Consumer surplus decreases significantly, producer surplus decreases slightly.

Question 18

What is overall economic welfare (OEW) in a market?

Accepted Answer

The sum of consumer surplus and producer surplus.

Supply, Demand, and Elasticity: Core Microeconomic Concepts

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