Usman Institute of Technology
HW-2-B Spring 2021 Semester
Course Code: HS 252
Course Title: Economics
Maximum Marks: 20
Submission Date: 08/05/2021
Max Time Allowed: 10 days
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1
Rain spoils the strawberry crop, the price rises from $4 to $6 a box, and the quantity demanded
decreases from 1,000 to 600 boxes a week.
a) Calculate the price elasticity of demand over this price range.
The price elasticity of demand is 1.25. The price elasticity of demand equals the percentage change in the
quantity demanded divided by the percentage change in the price. The price rises from $4 to $6 a box, a
rise of $2 a box. The average price is $5 a box. So the percentage change in the price is $2 divided by $5
and then multiplied by 100, which equals 40 percent. The quantity decreases from 1,000 to 600 boxes, a
decrease of 400 boxes. The average quantity is 800 boxes. So the percentage change in quantity is 400
divided by 800, which equals 50 percent. The price elasticity of demand for strawberries is 50 percent
divided by 40 percent, which equals 1.25.
b) Describe the demand for strawberries.
The price elasticity of demand exceeds 1, so the demand for strawberries is elastic.
Page | 1 of HW-2-B-ECO
2
The demand schedule for hotel rooms is in the table.
Price ($/night) Quantity Demanded
(millions of rooms/night)
200
100
250
80
400
50
500
40
800
25
a) What happens to total revenue when the price falls from $400 to $250 a night and from $250 to
$200 a night?
When the price is $400, the total revenue is equal to $400 × 50 million rooms, or $20 billion. When the
price is $250, the total revenue is equal to $250 × 80 million rooms, or $20 billion. So, the total revenue
does not change when the price falls from $400 to $250 a night.
When the price is $250, the total revenue is equal to $250 × 80 million rooms, or $20 billion. When the
price is $200, the total revenue is equal to $200 × 100 million rooms, or $20 billion. So, the total revenue
does not change when the price falls from $400 to $250 a night.
b) Is the demand for hotel rooms elastic, inelastic or unit elastic?
The total revenue is the same at all prices, $20 billion. Because a change in price does not change the total
revenue at any price, the demand is unit elastic at all prices.
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3
The figure shows the demand for pens.
Quantity Demanded
14
12
10
8
6
4
2
0
0
20
40
60
80
100
120
140
Calculate the elasticity of demand when the price rises from $4 to $6 a pen. Over what price range is the
demand for pens elastic?
The total revenue is the same at all prices, $20 billion. Because a change in price does not change the total
revenue at any price, the demand is unit elastic at all prices.
from $4 to $6, an increase of $2 a pen. The average price is $5 per pen. So the percentage change in the
price equals $2 divided by $5 and then multiplied by 100, which equals 40 percent. The quantity decreases
from 80 to 60 pens, a decrease of 20 pens. The average quantity is 70 pens. So the percentage change in
quantity demanded equals 20 divided by 70 and then multiplied by 100, which equals 28.6 percent. The
price elasticity of demand for pens equals 28.6 percent divided by 40 percent, which is 0.72.
The demand for pens is elastic at all prices higher than the price at the midpoint of the demand curve,
which indicates that the demand for pens is elastic at prices between $12 per pen and $6 per pen.
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4
In 2003, when music downloading first took off, Universal Music slashed the average price of a CD
from $21 to $15. The company expected the price cut to boost the quantity of CDs sold by 30
percent, other things remaining the same.
a) What was Universal Music’s estimate of the price elasticity of demand for CDs?
Using the data in the question, the price elasticity of demand is 0.90. The change in the price is $6 and the
average of the two prices is $18, so the percentage change in the price is ($6/$18) X 100, which equals
33.3 percent. The increase in the quantity demanded was estimated to be 30 percent. The price elasticity
of demand equals (30.0 percent)/ (33.3 percent), or 0.90.
b) If you were making the pricing decision at Universal Music, what would be your pricing decision?
Explain your decision.
The demand is inelastic, so if nothing else changes the price cut leads to a decrease in Universal Music’s
total revenue. However, downloaded music and CDs are substitutes for each other and the quantity of
downloaded music was forecast to rise substantially. Effectively, the price of downloading music fell as
more people gained access to the Internet and download sites proliferated. The fall in the price of the
substitute, downloaded music, decreases the demand for Universal Music’s CDs, so the decision to cut
prices most likely was forced as the result of the (forecasted) decrease in demand for CDs.
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5
If a 12 percent rise in the price of orange juice decreases the quantity of orange juice demanded by
22 percent and increases the quantity of apple juice demanded by 14 percent, calculate the
a) Price elasticity of demand for orange juice.
The price elasticity of demand for orange juice is 1.83. The price elasticity of demand is the percentage
change in the quantity demanded of the good divided by the percentage change in the price of the good.
So, the price elasticity of demand equals 22 percent divided by 12 percent, which is 1.83.
b) Cross elasticity of demand for apple juice with respect to the price of orange juice.
The cross elasticity of demand between orange juice and apple juice is 1.17. The cross elasticity of demand
is the percentage change in the quantity demanded of one good divided by the percentage change in the
price of another good. So, the cross elasticity of demand is the percentage change in the quantity
demanded of apple juice divided by the percentage change in the price of orange juice. The cross elasticity
equals 14 percent divided by 12 percent, which is 1.17.
Page | 5 of HW-2-B-ECO
6
The table sets out the supply schedule of jeans.
Price ($/pair)
120
125
130
135
Quantity Supplied
(millions of pairs/year)
24
28
32
36
Calculate the elasticity of supply when the price rises from $125 to $135 a pair.
The elasticity of supply equals the percentage change in the quantity supplied divided by the percentage
change in price. The percentage change in the quantity demanded equals [(36 - 28)/32] × 100, which is
25.0 percent. The percentage change in the price equals [($135 - $125)/$130] × 100, which is 7.7
percent. The elasticity of supply equals (25.0 percent/7.7 percent), which is 3.25.
Page | 6 of HW-2-B-ECO
Use the following graph, which shows the market for rental housing in Townsville, to work Problems 7
and 8.
7
a) What is the equilibrium rent and equilibrium quantity of rental housing?
The equilibrium rent is $450 a month and the equilibrium quantity are 20,000 housing units.
b) If a rent ceiling is set at $600 a month, what is the quantity of housing rented and what is the
shortage of housing?
The quantity of housing rented is equal to 20,000 units. If the rent ceiling is set at $600 per month, it is
above the equilibrium rent and so is ineffective. The rent stays at $450 per month and the quantity rented
remains at 20,000 housing units. There is no shortage of housing units. Because the rent ceiling is
ineffective, the market remains at its equilibrium so there is no shortage of housing units.
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8
If a rent ceiling is set at $300 a month, what is the quantity of housing rented, the shortage of
housing, and the maximum price that someone is willing to pay for the last unit of housing
available?
The quantity rented is 10,000 housing units. The quantity of housing rented is equal to the quantity
supplied at the rent ceiling. The shortage of housing is 20,000 housing units. At the rent ceiling, the
quantity of housing demanded is 30,000, but the quantity supplied is 10,000, so there is a shortage of
20,000 housing units. The maximum price that someone is willing to pay for the 10,000th unit available is
$600 a month. The demand curve tells us the maximum price that someone is willing to pay for the
10,000th unit.
Page | 8 of HW-2-B-ECO
Use the following data to work Problems 9 to 11.
The table gives the demand and supply schedules of teenage labor.
Wage ($/Hour)
4
5
6
7
8
Quantity Demanded
(Hours/month)
3,000
2,500
2,000
1,500
1,000
Quantity Supplied
(Hours/month)
1,000
1,500
2,000
2,500
3,000
9
Calculate the equilibrium wage rate, the number of hours worked, and the quantity of
unemployment.
The equilibrium wage rate is $6 an hour and 2,000 hours a month are worked. Unemployment is zero.
Everyone who wants to work for $6 an hour is employed.
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10 If a minimum wage for teenagers is set at $5 an hour, how many hours do they work and how many
hours of teenage labor are unemployed?
They work 2,000 hours a month. A minimum wage rate is the lowest wage rate that a teenager can be
paid for an hour of work. Because the equilibrium wage rate exceeds the minimum wage rate, the
minimum wage is ineffective. The wage rate will be $6 an hour and employment are 2,000 hours. There
is no unemployment. The wage rate rises to the equilibrium wage, the wage rate at which the quantity of
labor demanded equals the quantity of labor supplied. So, there is no unemployment.
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11 If a minimum wage for teenagers is set at $7 an hour,
a) How many hours do teenagers work and how many hours are unemployed?
At $7 an hour, 1,500 hours a month are employed and 1,000 hours a month are unemployed. The quantity
of labor employed equals the quantity demanded at $7 an hour. Unemployment is equal to the quantity
of labor supplied at $7 an hour minus the quantity of labor demanded at $7 an hour. The quantity supplied
is 2,500 hours a month and the quantity demanded is 1,500 hours a month, so 1,000 hours a month are
unemployed.
b) Demand for teenage labor increases by 500 hours a month. What is the wage rate paid to
teenagers and how many hours of teenage labor are unemployed?
The wage rate is $7 an hour, and unemployment is 500 hours a month. At the minimum wage of $7 an
hour, the quantity demanded is 2,000 hours a month and the quantity supplied is 2,500 hours a month so
500 hours a month are unemployed.
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12 The table gives the demand and supply schedules for chocolate brownies.
Wage ($/Hour) Quantity Demanded
Quantity Supplied
(millions/day)
(millions/day)
50
5
3
60
4
4
70
3
5
80
2
6
90
1
7
a) If brownies are not taxed, what is the price of a brownie and how many are bought?
With no tax on brownies, the price is 60 cents a brownie and 4 million a day are bought.
b) If sellers are taxed 20¢ a brownie, what is the price? How many are sold? Who pays the tax?
The price paid by buyers, including the tax, is 70 cents a brownie, and 3 million brownies a day are
bought. The price received by sellers, excluding the tax, is 50 cents a brownie. Consumers and sellers
each pay 10 cents of the tax on a brownie.
c) If buyers are taxed 20¢ a brownie, what is the price? How many are bought? Who pays the tax?
The price received by sellers, excluding the tax, is 50 cents a brownie, and 3 million brownies a day are
consumed. The price paid by buyers, including the tax, is 70 cents a brownie. Consumers and sellers each
pay 10 cents of the tax.
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