Question

Quantity Demanded (Income=$10,000) Quantity Demanded (Income-$12,000) a. Use the midpoint method to calculate your price elasticity of demand as the price of compact discs increases from $8 to $10 if your income is $12,000 b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,000 if the price is $16 3 (30 points). 9. Consider the following policies, each of which is aimed at reducing violent crime by reducing the use of guns. Illustrate each of these proposed policies in a supply and demand diagram of the gun market. a. a tax on gun buyers b. a price floor on guns 4 (20 points). 4. Emie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: - Cost of first bottle $1 - Cost of second bottle - Cost of third bottle 5 - Cost of fourth bottle a. From this information, derive Emie's supply schedule. Graph his supply curve for bottled water. b. If the price of a bottle of water is $4, how many bottles does Emie produce and sell? How much producer surplus does Emie get from these sales? Show Ernie's producer surplus in your graph.

Answer 1

2)a. Mid point price elasticity of demand can be measured with following formula -

Ep = (∆Q/∆P)*(P/Q). Here ∆P is change in price and ∆Q is change in quantity. Here if price increases from $8 to $10 then change in price is $2 and due to this price change quantity changes from 50 to 45 when income level is $12,000. So change in quantity i.e ∆Q=5. Previous P =$8 and previous Q = 50. So Ep = (∆Q/∆P)*(P/Q) = (5/2)*(8/50) = 40/100 =0.4. As price elasticity of demand is negative so we can say mid point own price elasticity of demand is -0.4 when income level is $12000.

2)b. When price is $16, change in quantity demand is 8 to 12 when income level changes from $10,000 to $12,000. Change in income is $2000. Change in quantity is 4. Income elasticity of demand is equal to. Ei = (∆Q/∆I)*(I/Q) = (4/2000)*(10000/8) = 40000/16000 = 2.5. Income elasticity of demand is positive here it is 2.4 i.e elastic demand. When price is $16 and income changes from $10,000 to $12,000.