Demand, Supply and Elasticity:
Applications and Exercises
Lecture 3 – academic year 2014/15
Introduction to Economics
Fabio Landini
Ex. 3.1 – The lottery
Question
Suppose you win 100 € at the lottery. You can
spend all the money in beers or invest them at
5%. How much does it cost to spend the money
you win in beers?
Hint: Reason in terms of opportunity cost…
Ex. 3.2 – Product development
Question
A company invested 5 mln. € to develop a new product,
expecting an equal return from the investment.
Problem: 5 mln are not enough to complete the product, 1
mln is needed.
Moreover: competition reduces the expectation reduces
the expectations to just 3 mln € sales.
Is it more convenient to stop or to continue the
commercialization of the product?
Hint: Reason in terms of MB vs. MC
Ex. 3.3 – Demand and Supply I
Question
Use the Demand & Supply model to answer the
following questions:
i) When a chill hits Sicily, what happens to the price of
oranges in Italy? Increases or decrease?
ii) When UK benefits of a mild winter, what happens to
the price of hotel rooms in Costa Brava? Increase or
decrease?
iii) When a war breaks out in Middle East, what
happens to the price of petrol an second-hand
Cadillac in US? Increase or decrease?
Ex. 3.4 – Demand and Supply II
Question
The market for cheese is characterized by the following
demand and supply curve:
Demand: QD= 9 – P
Supply: QO= 3P – 3
where P represent the price (in Euro per Kg.) and Q
represent the quantity (in Kg.).
How do the demand curve and supply curve look like
(draw)? Which is the value of the equilibrium prices and
quantities?
Ex. 3.5 – Elasticity I
If the % variation in quantity is smaller than the %
decrease in price, the value of E(p) is:
a) > 1 ;
b) < 1 ;
c) = 1.
If the quantity demanded is constant after a change
in the level of price, the value of E(p) is:
a) > 1 ;
b) < 0 ;
c) none of the above.
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Ex. 3.6 – Elasticity II
For each of these pair of goods say which good has
the most elastic demand?
(a) Textbooks vs. Science fiction books
Answer: Science fiction books, because they are
“luxury” goods. Textbooks are necessary for most
young people
b) Beethoven’s CD vs. Classical CD in general
Answer: Beethoven’s CD. Beethoven and Brahms are
closer substitute than a classical and a jazz CD
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Ex. 3.6 – Elasticity II
(c) Fuel in the short period (6 months) vs. petrol in the
long period (5 years)
Answer: Petrol in the long period. In the short period D
for fuel in inelastic, it is determined by the
technological conditions (given cars and industry) and
weather (heating). In the long period D for fuel is
instead relatively elastic (technological constraint are
lessened)
(d) Beer vs. water
Answer: Beer. Water is a necessary goods, whereas
beer is a “luxury” goods (it has many substitutes)
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Ex. 3.7 – Travellers
Hp.: business men and tourists have the following
demand for flight tickets on route New York-Boston
Qd –
Business men
150
2100
Price
Qd Tourists
1000
200
2000
800
250
1900
600
300
1800
400
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Ex. 3.7 – Travellers
Question:
1) Compute the elasticity for the two categories
of travellers
2) Which one of the two categories is
characterized by a less elastic demand? Why?
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Ex. 3.8 – Tom & Jerry
Question:
Tom and Jerry go to the petrol station. Tom
always demand 10 litres without even looking at
the price. Jerry always demand 10 euro of
petrol. Which is Tom’s and Jerry’s ED(p) ?
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