EIA2001 Microeconomics II

Tutorial 5

1. The San Francisco Chronicle reported that the toll on the Golden Gate Bridge was
raised from $2 to $3. Following the toll increase, traffic fell by 5 percent. Based on
this information, calculate the point price elasticity of demand. Is demand elastic or
inelastic? Explain.

2. Adriana is in charge of setting the price on basketball tickets for the local team’s
home games. From previous experience, she has estimated demand to be
P = 50 - 0.00166Q
where P represents price in dollars per seat, and Q represents seats that could be
sold per game. The seating capacity is 25,000 seats. Determine the number of
tickets that would be sold at a ticket price of $15 each. Also, determine the
consumer surplus that could be absorbed from these consumers if Adriana were able
to set ticket prices so that each customer (who values the ticket at least at $15) pays
the entirety of his or her actual valuation of the ticket.

3. Tom Wilson is the operations manager for Bi-Corp, a real estate investment firm. Tom
must decide if Bi-Corp is to invest in a strip mall in a northeast metropolitan area. If
the shopping center is highly successful, after tax profits will be $100,000 per year.
Moderate success would yield an annual profit of $50,000, while the project will lose
$10,000 per year if it is unsuccessful. Past experience suggests that there is a 40%
chance that the project will be highly successful, a 40% chance of moderate success,
and a 20% probability that the project will be unsuccessful.
a. Calculate the expected value and standard deviation of profit.
b. The project requires an $800,000 investment. If Bi-Corp has an 8% opportunity cost
on invested funds of similar riskiness, should the project be undertaken?