Besanko & Braeutigam

Microeconomics
Chapter 2
Review Questions (page 69): 2, 4, 5, 6, 7, 8.
Question 2:
Use supply and demand curves to illustrate the impact of the following events on the market for
coffee:
a) The price of tea goes up by 100 percent.
b) A study is released that links consumption of caffeine to the incidence of cancer.
c) A frost kills half of the Colombian coffee bean crop.
d) The price of Styrofoam coffee cups goes up by 300 percent.
Answer:
a) If we assume that tea is a substitute for coffee, an increase in the price of tea will cause an
increase in the demand for coffee and the curve for demand will shift to the right. This
increase in the demand with enhance the price in the market. Accordingly, the market
equilibrium and demand for coffee will raise. The increase in amount of demand for coffee
depends on cross price elasticity of coffee to the tea price.

b) The results of this study will decrease the demand for caffeinated drinks such as coffee. (It
may also considerable that the reduction in coffee demand in the long run would be greater
than short run because some people are addicted to coffee and they cannot change their
demand immediately however they would substitute coffee to other beverages in the long-
run run in order to reduce the chance of cancer.) This would be considered as change in
 preferences and it would cause that the demand curve shift to the left and the demand and
equilibrium will decrease.

c) The frost will reduce supply and the supply curve will shift to left and the equilibrium price
will raise and the equilibrium quantity will decrease.

d) Increasing the price for an input will increase the price for coffee and accordingly the
supply for coffee will reduce and the market price will increase and quantity will decrease.
(If the producer can substitute the Styrofoam coffee cups with other types of cup then the
price for coffee will not much increase and the producer will be able to manage the price.)
Question 4: A 10 percent increase in the price of automobiles reduces the quantity of automobiles
demanded by 8 percent. What is the price elasticity of demand for automobiles?
Answer:

ᵋQP
%∆𝑄 −8
= %∆𝑃 = 10 = -0.8

Question 5: A linear demand curve has the equation Q = 50 −100P. What is the choke price?
Answer: To find the choke price we should assume that the quantity is zero.
Q=50-100P
Q=0
50-100P=0
100P=50
P=50/100
P=0.5
Question 6: Explain why we might expect the price elasticity of demand for speedboats to be more
negative than the price elasticity of demand for light bulbs.
Answer: Speedboats are considered as luxury goods but light bulbs are more likely to be necessary
goods. For necessary items the change in quantity demanded will be relatively smaller for any
percent change in price than for a luxury item. Accordingly, the percent change in quantity
demanded would be higher for the luxury item for any given percent change in price and as the
price increase the quantity demanded for speedboats would decrease more than the demand for
light bulbs.
Question 7: Many business travelers receive reimbursement from their companies when they
travel by air, whereas vacation travelers typically pay for their trips out of their own pockets. How
would this affect the comparison between the price elasticity of demand for air travel for business
travelers versus vacation travelers?
Answer: Because business travelers are reimbursed for expenses, they are likely to be less sensitive
to price changes than an out-of-pocket vacation traveler. This means that the price elasticity of
demand for holiday travelers will be higher than business travelers.
Here is the basic theory of price elasticity of demand. Price elasticity The demand for air travel is
inelastic for business travelers, so they reimburse the cost of travel from their company. While the
price elasticity of demand for holiday travelers is elastic, it means that when there is a small change
in the price of a plane ticket, the demand for it will change significantly.
Question 8: Explain why the price elasticity of demand for an entire product category (such as
yogurt) is likely to be less negative than the price elasticity of demand for a typical brand (such as
Dannon) within that product category.
If the price of a particular product, such as Dannon, changes increases, then it is easy for the
consumer to switch to another brand and find another substitution, which means a relatively high
percentage change in the amount of demand for the product. On the other hand, if prices change
for the whole product category, alternatives will not be found easily and the percentage change in
the amount of demand for the product category will be relatively lower. This means that the
elasticity for the whole product category will be more than the elasticity for a single product.

Problems (page 70); 2.1, 2.2., 2.3., 2.4., 2.5., 2.11.

2.1. The demand for beer in Japan is given by the following equation:
Qd = 700 − 2P − PN + 0.1I, where P is the price of beer, PN is the price of nuts, and I is average
consumer income.
a) What happens to the demand for beer when the price of nuts goes up? Are beer and nuts demand
substitutes or demand complements?
b) What happens to the demand for beer when average consumer income rises?
c) Graph the demand curve for beer when and PN = 100 and I = 10,000.
Answer:
a) When the price of nuts increases or goes up the demand for beer will decrease and the
demand curve will shift to the left. Beer and nuts are complement goods.

b) An increase in income level of people will cause the demand for goods increase. In this
case as the income increases the demand for beer will increase and the graph will shift to
the rightward because people will have more money to allocate for purchasing beer.

c) Qd = 700 − 2P − PN + 0.1I
PN=100 and I = 10,000
Qd= 700-2P-100+0.1*10000
Qd= 700-2P-100+1000
 Qd= 1600-2P

Qd=0 1600=2P 2P=1600 P=800

P=0 Qd=1600-0 Q=1600

P=800

Q
Q=1600

2.2. Suppose the demand curve in a particular market is given by Q = 5 − 0.5P.

a) Plot this curve in a graph.
b) At what price will demand be unitary elastic?
Answer:
a) Q=5-0.5P we can write the equation as 2Q=10-P or P=10-2Q
P=0 2Q=10 Q= 5
Q=0 10-P=0 P=10
P

P=10

Q
Q=5

b) Unitary elastic=-1 or ᵋQP =-1

Q=5-1/2P
Continue in picture
2.3. The demand and supply curves for coffee are given by Qd = 600 − 2P and Qs = 300 + 4P.
a) Plot the supply and demand curves on a graph and show where the equilibrium occurs.
b) Using algebra, determine the market equilibrium price and quantity of coffee.
Answer:
In equilibrium point Qd=Qs Qd= 600-2(50) Qd=500 Qs=500
600-2P=300+4P
2P+4P= 600-300
6P=300
P=50

2.4. Suppose that demand for bagels in the local store

is given by equation Qd = 300 − 100P. In this equation, P denotes the price of one bagel in
dollars.
a) Fill in the following table:

P 0.10 0.45 0.50 0.55 2.50

Qd 290 255 250 245 50

ᵋ
-0.035 -0.175 -0.2 -0.225 -5
QP

Qd= 300-100(0.1) = Qd= 290 for using this formula we can find Qd for other value of P.
We can consider as the price increase the demand decrease

ᵋ QP = -b(P/Q) = -100(0.10/290) = 0.03448=0.035 P

b) Plot this curve in a graph. Is it linear? Q=3

Q=a-bP the equation Qd= 300-100P is liner.
P=0 Qd=300 Qd=0 P=3
Q

Q=300
 c) At what price is demand unitary elastic? P=1.5

d) At what price is demand inelastic?

For all prices below or lower than 1.5 the demand is inelastic.

e) At what price is demand elastic?

For all prices which are above 1.5 or higher than 1.5 the demand is elastic.

2.5. The demand curve for ice cream in a small town has been stable for the past few years. In
most months, when the equilibrium price is $3 per serving for the most popular ice cream,
customers buy 300 servings per month. For one month the price of materials used to make ice
cream increased, shifting the supply curve to the left. The equilibrium price in that month increased
to $4, and customers bought only 200 portions in the month. With these data draw a graph of a
linear demand curve for ice cream in the town. Find price elasticity of demand for prices equal to
$3 and $4. At what price would the demand be unitary elastic?
2.11. Suppose that the quantity of corn supplied depends on the price of corn (P) and the amount
of rainfall (R). The demand for corn depends on the price of corn and the level of disposable
income (I). The equations describing the supply and demand relationships are
Qs = 20R + 100P and Qd = 4,000 − 100P + 10I.
a) Sketch a graph of demand and supply curves that shows the effect of an increase in rainfall on
the equilibrium price and quantity of corn.
b) Sketch a graph of demand and supply curves that shows the effect of a decrease in disposable
income on the equilibrium price and quantity of corn.
Answer:
a) An increase in rainfall will increase the supply of corn in the market and it will cause
lowering market equilibrium and market quantity will increase. (supply curve will shift to
right

b) A decrease in disposable income will decrease the demand for corn in the market and it
will cause that market equilibrium and market quantity decrease. (demand curve will shift
to left)