ECON 101 Tutorial: Week 2

1
ECON 101 Tutorial Week 2

• Shane Murphy
• s.murphy5_at_lancaster.ac.uk
• Office Hours Monday 300-400 LUMS C86

2
Outline

• Substitute Lecturer Next Week
• Roll Call
• Class Rep
• Problems
• Discussion

3
Class Rep
4
Exercise

• Consider the following demand function
  QA100-8PA0.5PB2Y, where QA is the quantity
  demanded of good A, PA is the price of good A, PB
  is the price of good B and Y is the income.
• If PA 7, PB12 and Y4.5 calculate the price
  elasticity of demand of good A. Is the demand
  elastic or inelastic?
• First, let us solve for QA
• QA 100 - 8PA 0.5PB 2Y
• 100 8 (7) 0.5 (12) 2 (4.5)
• 100 56 6 9 59

5
Exercise

• Consider the following demand function
  QA100-8PA0.5PB2Y, where QA is the quantity
  demanded of good A, PA is the price of good A, PB
  is the price of good B and Y is the income.
• a) If PA 7, PB12 and Y4.5 calculate the price
  elasticity of demand of good A. Is the demand
  elastic or inelastic?

6
Exercise

• If PA 7, PB12, Y4.5 and QA 59, and
  QA100-8PA0.5PB2Y calculate the price
  elasticity of demand of good A. Is the demand
  elastic or inelastic?
• Ped dQA/dPA PA/QA
• dQA/dPA -8
• ped dQA/dPA PA/QA -8 7/59 -56/59
• By convention, we write ped 56/59 (positive)
• Elasticity of Demand is Inelastic (pedlt1)

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Exercise

• If PA 7, PB12, Y4.5 and QA 59, and
  QA100-8PA0.5PB2Y calculate the calculate the
  income elasticity. What kind of good is A?
  (Normal/Inferior? If normal then necessity or
  luxury?)
• ied dQA/dY Y/QA
• dQA/dY 2
• ied dQA/dY Y/QA 2 4.5/59 9/59
• This is a normal good (iedgt0)
• This is a necessity (0ltiedlt1)

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Exercise

• If PA 7, PB12, Y4.5 and QA 59, and
  QA100-8PA0.5PB2Y calculate the cross price
  elasticity. What kind of goods are A and B?
  (Complements or substitutes?)
• cped dQA/dPB PB/QA
• dQA/dPB 0.5
• cped dQA/dPB PB/QA 0.5 12/59 6/59
• These goods are substitutes (cped gt 0)

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Exercise 5
Price Quantity Demanded (Y 10,000) Quantity Demanded (Y 12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

• Suppose that your demand
• Schedule for DVDs is as follows
• Use the midpoint method to calculate your price
  elasticity of demand as the price of DVDs
  increases from 8 to 10 for income of 10,000 and
  income of 12,000.
• Income of 10,000
• ped (QA QB)/(QA QB/2)/(PA PB)/(PA
  PB/2)
• (40 32)/(40 32/2)/(8 10)/(8
  10/2)
• (8/36)/(-2/9)
• -4/4 -1

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Exercise 5
Price Quantity Demanded (Y 10,000) Quantity Demanded (Y 12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

• Suppose that your demand
• Schedule for DVDs is as follows
• Use the midpoint method to calculate your price
  elasticity of demand as the price of DVDs
  increases from 8 to 10 for income of 10,000 and
  income of 12,000.
• Income of 12,000
• ped (QA QB)/(QA QB/2)/(PA PB)/(PA
  PB/2)
• (50 45)/(50 45/2)/(8 10)/(8
  10/2)
• (5/47.5)/(-2/9)
• -45/95 -0.47

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Exercise 5
Price Quantity Demanded (Y 10,000) Quantity Demanded (Y 12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

• Suppose that your demand
• Schedule for DVDs is as follows
• Use the midpoint method to calculate your income
  elasticity of demand as your income increases
  from 10,000 to 12,000 for price of 12 and price
  of 16.
• Price of 12
• ied (QA QB)/(QA QB/2)/(YA YB)/(YA
  YB/2)
• (24 30)/(24 30/2)/
• (10,000 12,000)/(10 ,000 12,000/2)
• (-6/27)/(-2/11)
• 66/54 1.22

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Exercise 5
Price Quantity Demanded (Y 10,000) Quantity Demanded (Y 12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

• Suppose that your demand
• Schedule for DVDs is as follows
• Use the midpoint method to calculate your income
  elasticity of demand as your income increases
  from 10,000 to 12,000 for price of 12 and price
  of 16.
• Price of 16
• ied (QA QB)/(QA QB/2)/(YA YB)/(YA
  YB/2)
• (8 12)/(8 12/2)/
• (10,000 12,000)/(10 ,000 12,000/2)
• (-4/10)/(-2/11)
• 44/20 2.2

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Exercise 7

• Consider public policy aimed at smoking
• Studies indicate the ped for cigarettes is about
  0.4. If a packed of cigarettes is currently
  priced at 6 and the government wants to reduce
  smoking by 20, by how much should it increase
  the price?
• If the government permanently increases the price
  of cigarettes, will the policy have a larger
  effect on smoking one year from now or five years
  from now?
• Studies also find that teenagers have a higher
  price elasticity of demand for cigarettes than do
  adults. Why might this be true?
• a) ped change in Q/ change in P
• 0.4 -0.2/ change in P
• change in P -0.2/0.4 -1/2
• price should increase by 50 percent (4 using the
  midpoint method)
• Goods tend to be more elastic over longer time
  horizons, so the policy will have a smaller
  effect in the short run than the long run

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Exercise 7

• Consider public policy aimed at smoking
• Studies indicate the ped for cigarettes is about
  0.4. If a packed of cigarettes is currently
  priced at 6 and the government wants to reduce
  smoking by 20, by how much should it increase
  the price?
• If the government permanently increases the price
  of cigarettes, will the policy have a larger
  effect on smoking one year from now or five years
  from now?
• Studies also find that teenagers have a higher
  price elasticity of demand for cigarettes than do
  adults. Why might this be true?
• c) ped might be a function of income
• as income increases, elasticity falls
• ped might be a function of age
• as people get older, they are less flexible,
  and have more inelastic demand functions
• ped might be a function of the experiences of
  the consumer
• Older smokers might be more addicted and less
  elastic to price changes
• Older smokers might have a taste for fewer
  substitutes for smoking