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ECO 101 Assignment II

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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?
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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!
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