Question

1-

1. We are examining the market for gold picture frames in Ontario. Given below are the demand schedule and supply schedule for this product for one year. Accurately graph the demand and supply curves on one graph and determine equilibrium in this market. Label the graph and axises properly. State where equilibrium is (both price and quantity), don’t just point to it on the graph. Make sure you have the price and quantity demanded on the correct axis.   (5 marks – 4 marks for graph and 1 mark for equilibrium)

Price	Quantity Demanded
$50	1,750,000
$60	1,575,000
$95	1,330,000
$100	1,300,000
$120	1,295,000
$160	1,085,000
$185	900,000
$200	750,000

Price	Quantity Supplied
$50	620,000
$60	740,000
$95	865,000
$100	910,000
$120	1,295,000
$160	1,750,000
$185	1,925,000
$200	2,075,000

5

a. Using the data found in Question 1, calculate the elasticity of demand and elasticity of supply at each price change in the market for gold picture frames using the midpoint formula for both supply and demand. Because you are calculating the change between two levels, you will have 7 calculations for the 8 prices. (2 marks – 1 mark each for correct demand and correct supply elasticities)

Price	Quantity Demanded	Elasticity of Demand	Quantity Supplied	Elasticity of Supply
$50	1,750,000		620,000
$60	1,575,000		740,000
$95	1,330,000		865,000
$100	1,300,000		910,000
$120	1,295,000		1,295,000
$160	1,085,000		1,750,000
$185	900,000		1,925,000
$200	750,000		2,075,000

                                                                                            

b.   Based on your elasticity of demand calculation, if the price of gold picture frames rises from $100 to $120 will total revenue go up or down? Explain. You need to answer the first part of this question by explaining how you interpreted the elasticity of demand at this point. How much will revenue change (in dollar terms)? (2 marks – 1 mark for calculation, one mark for explanation using elasticity)

Answer 1

1.

The demand schedule is the plotting of different quantity demanded given various price, while the supply schedule is the plotting of the quantity supplied at given various price levels. The market for gold is depicted in the figure below:

$250 $200 $150 Price $120 - Demand Supply $100 500,000 1,000,000 1,295,000 2,000,000 2,500,000 Quantity

The equilibrium occurs where the demand schedule intersects the supply schedule. This occurs at E. The point E given the point where the quantity demanded equilibrate with quantity supplied at a particular price. At equilibrium, the equilibrium quantity is 1,295,000 and the price is $120.

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5.

a)

The elasticity of demand is the percentage change in the quantity demanded due to a 1% change in the price. The elasticity of demand is measured as

ed = 02-01 (Q2+Q.)/2 P.-P. (P2+P1)/2

The elasticity of supply is the percentage change in the quantity supplied due to a 1% change in the price. The elasticity of supply is measured as

02-01 (Q2+1)/2 es = P-P_ (P2+P1)/2

Using the formula the elasticities are calculated below

Price	Quantity Demanded	Elasticity of Demand	Quantity Supplied	Elasticity of Supply
$50	1,750,000		620,000
$60	1,575,000	-0.57895	740,000	0.970588
$95	1,330,000	-0.37349	865,000	0.344904
$100	1,300,000	-0.44487	910,000	0.988732
$120	1,295,000	-0.02119	1,295,000	1.920635
$160	1,085,000	-0.61765	1,750,000	1.045977
$185	900,000	-1.28615	1,925,000	0.657143
$200	750,000	-2.33333	2,075,000	0.9625

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b)

Here as P rises the total revenue rises from $130,000,000 to $155,400,000.

The total revenue is given as

TR = P x 2

Change in TR due to change in price is given as

d(TR) = 2+PP

| d[TR] PdQ =Q1+a . dp QdP

(TR) 2= Q(1+ed) dP

At equilibrium as to price changes from $100 to $120, the elasticity of demand is -0.02119. Therefore, from the above equation

.DTR) 2= Q(1 – 0.02119) = 0.97118 > 0 dP

Then as P rises the total revenue rises with a rise in P, as at $120 the demand is inelastic. The percentage change in price is more than the change in quantity. Then the total revenue increases with price.