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Economics 1102 Homework #1
Define or explain briefly. Ten points each.
(1) perfect market
(2) efficient resource allocation
Part II. True or false. Explain (be sure to). Twenty points.
(3) If a resource allocation is efficient, then it is desirable.
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Part III. Quantitative Problems.
(4) 20 points. Prior to the destruction of the World Trade Center, air travel in the United States
was forecast for the year 2013 at 1515 billion seat miles at a price of $165 million per billion seat
miles. The (arc) price elasticity of demand for air travel is estimated to be -.75. Even if the
demand for air travel is fully restored, i.e., the confidence in air travel returns to its pre-disaster
level, the price of air travel is expected to increase by over 40% due to the implementation of
new security procedures. Given this, and the price elasticity of demand of -.75, what would be
the projected number of seat miles of air travel in the United States in the year 2012? Provide
your answer in the table below.
Note, the elasticity formula to be used in solving the problem is given by,
 Q2  Q1  P2  P1 
%QuantityDemanded
 E   .75  

.
% Pr ice
 P2  P1  Q2  Q1 
Case
Projected Air Travel And Costs for 2013
Billion Seat Miles (BSM)
Price ($Billion/BSM)
Projection-Pre 9/11/01
Q1 = 1515
P1 = 165
Projection Post-9/11/01
Q2 = ?
P2 = 235
Note: In the above, Seat Miles is the variable and price is the parameter.
(5) 40 points. Consider the formulation of a model to "explain" the number of visitors to Atlantic
City per month. Let this be the variable, V = the number of visitors to Atlantic City in a month.
For the example, assume that people visit Atlantic City (AC) due to: a) its characteristics as a
seaside resort; and, b) due to the opportunity to gamble at casinos there. In a given month AC's
attractiveness as a resort could be measured by the weather. For this purpose let S = the number
of predominately sunny days in a month and T = the number of days in the month with the
temperature at noon no lower than 85 Fo. For the influence of gambling use E = the dollars spent
by all casinos in a month on advertising and promotions and C = the number of casinos operating
outside of Atlantic City within a hundred mile radius. The idea of the model is that, given the
values of S, T, E, and C projected for a month, there should be a reasonable chance of predicting
the value of V for the given month. V is the variable and {S,T,E, C} are the parameters. These
relationships are revealed by the functional notation,
V = f(S, T, E, C).
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In this notation, the value(s) to the left of the equal sign denote variables, the symbol(s), here "f",
in front of the parenthetical denotes a relationship (i.e., function), and the values within the
parentheses denote the parameters.
Data. Consider the data below collected in the mid-six months of the year 2013.
Month
APR
MAY
JUN
JUL
AUG
SEP
V
250000
245000
250000
275000
280000
300000
S
20
20
21
23
23
23
T
18
18
22
22
22
24
E
400000
400000
405000
405000
425000
405000
C
5
6
6
6
6
6
Based on the data above, compute the arc elasticity of visitors (V) to each of S, T, E, and C.
Place your answers in the table below using our standard format. Be sure to indicate which pair
of months were used when computing each elasticity.
Variable/Parameter
S
T
E
C
V
Based on the size of the elasticities, does it look like the weather related parameters or the casino
related parameters are more important in explaining the number of visitors that come to Atlantic
City.
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