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ECON 1000-0LA - Group Assignment #1 - Answers
Microeconomics (Humber Polytechnic)
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lOMoARcPSD|30761579
1.
(a)
Suppose in the market for bicycles, the supply curve is 𝑃 = 30 + 2𝑄 and the demand curve is 𝑃 =
90 − 2𝑄, where 𝑃 is the price of bicycles and 𝑄 is the quantity of bicycles supplied or demanded
per year.
Show how to solve for equilibrium quantity 𝑄 𝑒 and price 𝑃𝑒 of bicycles, and total revenue to
producers 𝑇𝑅 𝑒 .
𝑃𝑒
(b)
𝑄𝑒
60
𝑇𝑅 𝑒
900
Suppose the government considers the equilibrium price 𝑃𝑒 from part (a) being too high such that
low-income households cannot afford bicycles and it legislates to change the price of bicycles by
$20 with a binding price ceiling 𝑃𝑐 . Show how to solve for the binding price ceiling 𝑃𝑐 ,. At 𝑃𝑐 ,
solve the quantity of bicycles supplied 𝑄𝑐𝑆 and demanded 𝑄𝑐𝐷 , the quantity of excess supply
(surplus) or demand (shortage), and total revenue to producers 𝑇𝑅𝑐 .
𝑃𝑐
40
(circle one) Shortage / Surplus quantity
(c)
15
𝑄𝑐𝑆
20
5
𝑄𝑐𝐷
𝑇𝑅𝑐
25
200
Suppose bicycle producers used to consume 40 bottles of red wine when their income was at 𝑇𝑅 𝑒
in part (a) and their red wine consumption drops to 8 bottles as their income changes to 𝑇𝑅𝑐 in
part (b). Calculate the income elasticity of red wine for bicycle producers. Hint: Use the midpoint formula. Is red wine an inferior, a normal, or a luxury item to bicycle producers?
𝜂𝐼 = 1.0476 (luxury)
(d)
Following the notations: 𝜂12 represents the cross elasticity of the quantity demanded for good 1
when the price of good 2 changes, “𝑏” for bicycles, “𝑠” for skateboards, and “𝑢” for unicycles.
The cross-price elasticity of the quantity demanded for unicycles when the price of bicycles
changes is 𝜂𝑢𝑏 = 2, and the cross-price elasticity of the quantity demanded for skateboards when
the price of bicycles changes is 𝜂𝑠𝑏 = 1.5. According to the price change between part (a) and
part (b), calculate the percentage change in quantity demanded for unicycles and skateboards. Use
your results to explain how unicycles and skateboards are related to bicycles. Hint: Use the midpoint formula.
The quantity of unicycles demanded will fall by 80%.
The quantity of skateboards demanded will fall by 60%.
Bicycles and unicycles are closer substitutes than bicycles and skateboards.
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