East West University Semester: Spring’ 2021; ECO 101 (S07); Assignment – II Due on 15 April, 2021 Elasticity and its Application 1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why? (4 marks) a. Required textbooks or novels of Humayun Ahmed b. James recordings or classical music recordings in general c. Public bus rides during the next 6 months or bus rides during the next 5 years d. Sprite or water 2. The price of coffee rose sharply last month, while the quantity sold remained the same. Five people suggest various explanations: (10 marks) Leonard: Demand increased, but supply was perfectly inelastic. Sheldon: Demand increased, but it was perfectly inelastic. Penny: Demand increased, but supply decreased at the same time. Howard: Supply decreased, but demand was unit elastic. Raj: Supply decreased, but demand was perfectly inelastic. Who could possibly be right? Use graphs to explain your answer. . 3. Suppose that business travelers and vacationers have the following demand for airline tickets from Calgary to Toronto: (10 marks) 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? (Use the midpoint method in your calculations.) b. Why might vacationers have a different elasticity from business travelers? Page 1 of 2 East West University Semester: Spring’ 2021; ECO 101 (S07); Assignment – II Due on 15 April, 2021 Consumers, Producers, and the Efficiency of Markets 4. Sakib buys an iPhone for $240 and gets consumer surplus of $160. (6 marks) a. What is his willingness to pay? b. If he had bought the iPhone on sale for $180, what would his consumer surplus have been? c. If the price of an iPhone were $500, what would his consumer surplus have been? 5. It is a hot day, and Ovi is thirsty. Here is the value he places on each bottle of water: Meanwhile, Emon owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: Consider a market in which Ovi is the buyer and Emon is the seller. a. Use Emon’s supply schedule and Ovi’s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these prices brings supply and demand into equilibrium? b. What are consumer surplus, producer surplus, and total surplus in this equilibrium? c. If Emon produced and Ovi consumed one fewer bottle of water, what would happen to total surplus? d. If Emon produced and Ovi consumed one additional bottle of water, what would happen to total surplus? (20 marks) Best of Luck! Page 2 of 2
