Question

4. Suppose you are given the following demand schedule for 4 individuals. Use this information to complete the rest of the question. Price Ringo Paul John George Market 0 0 0 248 9 6 8 16 10 10 12 32 11 | 14 | 16 40 50 12 18 20 48 a) (5 points) Fill in the blanks above to determine the market demand schedule. b) (4 points) How does Ringo's own-price elasticity of demand compare with the market's own-price elasticity of demand when moving from P = $5 to P = $4? Make sure to use the midpoint method. c) (2 points) State the equilibrium price and quantity given the market supply schedule looks like: Price Market Supply 83 81 75 0 d) (2 points) If the government imposes a price floor at $5 what happens in the market? Explain.

Answer 1

4. a)

Market demand schedule is the sum of individual schedule.

Price($) Ringo George Market 5 8 22 16 39 10 32 64 10 11 14 16 40 81 1 O 12 18 20 48 98

b) For Ringo,

P1 = 5      Q1 = 7

P2 = 4      Q2 = 8

Ringo's own PED = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

                             = (8 - 7) / (4 - 5) * (5 + 4) / (7 + 8)

                             = (1 / -1) * (9 / 15)

                             = -9 / 15

                             = -0.6

The absolute value of PED is 0.6. Since PED is less than 1, the demand is inelastic.

For the Market,

P1 = 5      Q1 = 7

P2 = 4      Q2 = 22

Ringo's own PED = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

                             = (22 - 7) / (4 - 5) * (5 + 4) / (7 + 22)

                             = (15 / -1) * (9 / 29)

                             = -135 / 29

                             = -4.65

The absolute value of PED is 4.65. Since PED is greater than 1, the demand is elastic.

c)

Price($) Market Demand Market Supply 83 5 81 22 39 64 75 64 81 41

The equilibrium occurs at the point where market demand is equal to market supply. Fro the above table, it is seen that the equilibrium price is $2 and quantity id 64.

d) If government imposes a price floor of $5, at this price quantity supplied is 83 and quantity demanded is 7. So, there will be a surplus of 83 - 7 = 76 units in the market.