Assignment 1 (The law of supply and demand)

1- Suppose that we have the following price data:-

a- Calculate the percentage change in the price of each good.
b- Calculate the percentage change in the relative price of gasoline in terms of soda.
c- Why do we only worry about relative prices in economics?
Year Price of Gasoline Price of Soda
1987 $ 0.89 per gallon $ 0.35 per 16 oz. bottle
2005 $ 2.39 per gallon $ 1.49 per 16 oz. bottle
–
a) Gasoline Soda
b) Old = & New = 
c) Because Relative prices remove any inflation effects
2- Suppose that you have the following demand and supply curve for rental
cars, find the equilibrium price and quantity. Qd ,Qs
∵ We in equilibrium price and quantity
∴ Qd = Qs   
3- Suppose that you estimated the following demand curve for footballs.

Q = Represents quantity demanded. P = represents price. I = represents

average income. You know that current market price is $50 and average
income is $20,000.
a) Calculate current demand.
b) Calculate the price elasticity of demand.
a) ( ) ( )
b) We suppose the change of the new price is 10% so the new price will be $ 55
∴ ( ) ( )

∴ ( )( ) ( )( )

4- Suppose, we know what demand and supply look like for restaurant meals
Qd , Qs
Where Q is the number of meals sold (in thousands) per month, P is the
average meal price, I is average income (in thousands). Assume that average
income is = $20,000.
a) Calculate the equilibrium price and quantity.
b) Calculate the elasticity of demand at the equilibrium price.
c) What effect would a 10% increase in average income have on the price of
restaurant meals?
a) ∵ we in equilibrium price and quantity
∴ Qd =Qs  ( )
 POld =15005 and QOld = 30030
c) The change of the new price is 10% so PNew = $ 16505.5 QNew = 33031
∴Qd = Qs  –  ( )


)∴ ( )( ) ( )( )
5- The demand and supply for a monthly cell phone plan with unlimited texts can be
represented by: Qd , Qs Where P is the monthly price in $.
a. If the current price for a contract is $40 per month, is the market in equilibrium?
b. Would you expect the price to rise, fall, or be unchanged?
c. If so, by how much? Explain.
a)Qd ( ) ,Qs
∵ Qd Qs ∴
b) The price needs to rise because there is shortage
c) Qd = Qs = Q*  P* P*  P* , Q*
∴
6- The demand and supply for monthly gym memberships are given as:-
Qd , Qs where P is the monthly price, in dollars
a. If the current price for memberships is $50 per month, is the
market in equilibrium?
B .Would you expect the price to rise or fall?
c. If so, by how much?
Qd ( )
Qs ( )
a) Qd Qs ∴
b) The price needs to fall because there is surplus
c) Qd = Qs = Q*  P* P*  P* , Q*
∴
7- Suppose that the supply of lemonade is represented by: QS
Where Q is measured in pints and P is measured in cents per pint.
a. If the demand for lemonade is QD , what is the current
equilibrium price and quantity?
b. Suppose that a severe frost in Florida raises the price of lemons, and thus
the cost of making lemonade. In response to the increase in cost, producers
reduce the quantity supplied of lemonade by 400 pints at every price. What is
the new equation for the supply of lemonade?
c. Compute the new equilibrium price and quantity of lemonade after the frost.
a) Qd = Qs   
s
b) The new supply is equal to the old supply so Q2 = Qs  Q2s
c) ∴  P2 Q2
8- The Supply & Demand of gym memberships QD , QS
Now, suppose the town opens a new community center with a pool and a
weight room. As a result, consumers demand 200 fewer gym memberships
at every price.
a. Write down the new demand equation.
b. What do you expect to happen to the equilibrium price and
quantity (remember, previously P*= $45, Q*= 150)?
c. Compute the new equilibrium price and quantity.
a) Quantity demanded has fallen by 200 at every price so the eq.is QD
b) The equilibrium price and quantity should fall because the demand curve had shift
c) Qd = Qs    
9- The demand for gym memberships in a small town is given as: QD
where Q is the number of monthly members and P is the monthly membership
rate.
Answer the following questions:
a. Calculate the price elasticity of demand when the price of gym memberships is
$50 per month.
b. Calculate the price elasticity of demand when the price of gym memberships is
$100 per month.
c. Based on your answers to a. and b., what can you tell about the relationship
between price and the price elasticity of demand along a linear demand curve?
a) We suppose the change of the new price is 10% so PNew = $ 55
QNew ( ) , POld =50 and QOld = 260

∴ ( )( ) ( )( )
b) We suppose the change of the new price is 10% so PNew = $ 110
QNew ( ) , POld =100 and QOld = 160

∴ ( )( ) ( )( )
c) I tell that the price rises along a linear demand curve.

10- The demand for movie tickets in a small town is given as QD

Answer the following questions:
a. Calculate the price elasticity of demand when the price of tickets is $5.
b. Calculate the price elasticity of demand when the price of tickets is $12.
c. At what price is the price elasticity of demand unit elastic?
d. What happens to the price elasticity of demand as you move down a linear
demand curve?
a) We suppose the change of the new price is 10% so PNew = $ 5.5
QNew ( ) , POld =$5 and QOld = 750

∴ ( )( ) ( )( )
b) We suppose the change of the new price is 10% so PNew = $ 13.2
QNew ( ) , POld = $12 and QOld = 400
∴ ( )( ) ( )( ) ( )

c) ∵ The demand is unit elastic and substitute in

 ( )
  #
d) The demand becomes less elastic or more inelastic.