Draft Solution

ECO 101. Se37, 39, 40, 41 Spring 2023 Dr Saima Khan (SaKn)

Problem Set 5 – Elasticity (Part 2)

Name: ID:

Sec: Date:

Instructions
• There are a total of five (5) questions in this paper. Please print out the
assignment, answer the questions in the space provided and submit the
hardcopy to me IN CLASS.
• Please submit by the deadline announced on CANVAS in the FIRST 15
minutes of class; late submissions will NOT be accepted.
• Any attempts to submit assignment by unfair means (including handing it to
my TA) will result in NEGATIVE marking.
• Please do not submit an extra cover page for this assignment – All relevant
information can be included in the table above! Use that paper to print out
your lecture slides instead!

Question 1 (2 marks)

An income elasticity of 2 for watermelon juice indicates that:

(a) Watermelon juice is inferior goods.

(b) Watermelon juice is normal goods.
(c) Watermelon juice is a close substitute of mango juice.
(d) Watermelon juice and Haleem are complements.

Justify:

YED 270 Watermelon juice is a normal good

This means as income t by 11 demand for watermelon
juice t 21
by
 ECO 101. Se37, 39, 40, 41 Spring 2023 Dr Saima Khan (SaKn)

Question 2 (4 marks)

A cross elasticity of demand of -.39 for good 1 indicates that:

(a) Good 1 is an inferior good.

(b) Good1 is a normal good.
(c) Good 1 is a close substitute of good 2.
(d) Good1 is a complement of good2.

Justify:

When Pat
CED o 39 0 by It people buy less of
good 1 and less of good 2 Demand falls by 0.397
Since purchase both goods falls they are complements
of
Question 3 (10 marks)

A company hires a group of consultants to bring about greater efficiency in the

transportation sector. They see that when train ticket prices are raised from BDT 300
to BDT 500, the quantity demanded falls by 25%. At the same time, this increase in
price raises the demand for bus tickets from 1500 to 1956. QT from 1500 to 1956
(a) Calculate the price elasticity of demand for train tickets.

t bP
PED
I.gg where 7 add 251
PI too

too
5003ft
57
0.37

(b) Based on your answer in (a), is the demand for train tickets elastic or inelastic?

PED o 371 0 37 41 Inelastic

As PT by It Qd
Q demanded falls by
0 37
falls less than proportionately So people are not very
responsive to price change
 ECO 101. Se37, 39, 40, 41 Spring 2023 Dr Saima Khan (SaKn)

(c) The authorities are trying to decide if they should increase train ticket prices
even more, to BDT 700 to generate greater total revenue. What advice would
you give the authorities? Explain.

since Demand for train tickets is inelastic

TRIP x Quupward pressure of Price stronger than
Q demanded TR will increase I would thus
downward pressure
of
advice the authorities to go ahead and raise price
(d) Calculate the cross elasticity of demand for bus tickets.

Pang 500 300 noo

D
1956 3921 1728
a
Garg
21
0 53
500 300 42 972g
(e) Are bus tickets inferior, normal, substitute or complement goods?

CED 0 5370 As P of train tickets T Demand for

bus ticket's t while q demanded of train tickets 17
Since purchase bus and train tickets mom in
of
are substitute goods
opposite directions they

time grand
(f) Given that price elasticity of income is -1.75, when income rises from BDT
50,000 to BDT 55,000, what is the associated change in demand for train
tickets?

t3IpFant YED msn.IE

1.75
35gffff.tn no
175
1st
I DD 17 5

Ans Demand falls by 17.51

is an inferiorgood
indicating train travel
 ECO 101. Se37, 39, 40, 41 Spring 2023 Dr Saima Khan (SaKn)

Question 4 (4 marks)

Elastic Supply

Salwith tax

as Ps c
bic supply
more Elastic
Demand
therm

4.1 The figure above represents the markets for yachts. If the government imposes a
$30,000 tax on yachts and collects it from the yacht suppliers, the ________ curve
supply
will shift ________ by ________.
3 ok
upwards
(a) demand; downward; $15,000
(b) supply; upward; $15,000
(c) supply; upward; $30,000
(d) demand; downward; $30,000

EW
4.2 Please draw and label the changes mentioned in 6.1 in the diagram above.
Shade the Cs Ps
44

4.3 When the government imposes a $30,000 tax on yachts (to be collected from
yacht producers), consumers will pay ___________ of the tax and producers will pay
______________.

Cs PS
(a) $ 20,000; $ 10,000
(b) $ 15,000; $ 15,000
(c) $ 10,000; $ 20,000
x
(d) $ 5,000; $ 25,000
Justify:

Blc when Demand is more inelastic CB PB Producers

able to pass on greater tax burden to consumers
ble consumers not very responsive to PD
 ECO 101. Se37, 39, 40, 41 Spring 2023 Dr Saima Khan (SaKn)

Question 5 (4 marks)

tax
S2 after
before tax
t
becomes
Say D
more inelastic
What happen
to PWL
DWL falls Why
The figure above shows the market for blue jeans. The government recently levied a Bic with
$10 tax on the producers of blue jeans. a more inelastra
production
Demand
Which area(s) in the figure above show(s):
loss is less
(a) Consumer surplus before the tax: ___________________________
atb to
(b) Producer Surplus before the tax: ____________________________
d te tf
(c) Consumer surplus after the tax: ___________________________
a
f
(d) Producer surplus after the tax: ____________________________
(e) Government revenue after tax is imposed: ____________________
dbt
(f) Deadweight Loss: __________________________________________
c te
(g) Area b+d is also part of the deadweight loss because producers and
consumers no longer benefit from it. Agree or disagree. Justify:

Disagree bk dw loss is the portion completely lost

to society post tax But bt d is Not the PWL bk
govt is partof society bed is simply a transfer
from consumer producer to
govt

Demand Curve was more

inelastic In that ease
1h Say
hat wow I ap