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PGP Managerial Economics supply demand elasticity

1.Which of the following is NOT an application of supply and demand analysis?


a. Understanding changing world economic conditions and their effects on prices.
b. Evaluating the effects of government price controls on the agricultural industry.
c. Determining how taxes affect consumers’ spending patterns.
d. all of the above.
e. none of the above.

1.A supply curve reveals


a. the quantity of output consumers are willing to purchase at each possible market
price.
b. the difference between quantity demanded and quantity supplied at each price.
c. the maximum level of output an industry can produce, regardless of price.
d. the quantity of output that producers are willing to produce and sell at each
possible market price.

3.Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of
plastic increases, with other things remaining the same, we would expect
a. the price of steel to fall.
b. the demand curve for steel to shift to the right.
c. the demand curve for plastic to shift to the left.
d. nothing to happen to steel because it is only a substitute for plastic.
e. the demand curve for steel to shift to the left.

4.Which of the following would shift the demand curve for new textbooks to the right?
a. A fall in the price of paper used in publishing texts.
b. A fall in the price of equivalent used text books.
c. An increase in the number of students attending college.
d. A fall in the price of new text books.

5.When an industry's raw material costs increase, other things remaining the same,
a. the supply curve shifts to the left.
b. the supply curve shifts to the right.
c. output increases regardless of the market price and the supply curve shifts upward.
d. output decreases and the market price also decreases.

6.Sugar can be refined from sugar beets. When the price of those beets falls,
a. The demand curve for sugar would shift right.
b. The demand curve for sugar would shift left.
c. The supply curve for sugar would shift right.
d. The supply curve for sugar would shift left.

7.The price of good A goes up. As a result the demand for good B shifts to the left. From this we can
infer that:
a. good A is used to produce good B.
b. good B is used to produce good A.
c. goods A and B are substitutes.
d. goods A and B are complements.
e. none of the above.

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Managerial Economics supply demand elasticity

8. Which of the following will NOT cause a shift to the right in the demand curve for beer?
a. A change in the price of beer.
b. A health study indicating positive health benefits of moderate beer consumption.
c. An increase in the price of French wine (a substitute).
d. A decrease in the price of potato chips (a complement).
e. none of the above.

9. When the current price is above the market-clearing level we would expect
a. quantity demanded to exceed quantity supplied.
b. quantity supplied to exceed quantity demanded.
c. a shortage.
d. greater production to occur during the next period.

10.Assume that the current market price is below the market clearing level. We would expect
a. a surplus to accumulate.
b. downward pressure on the current market price.
c. upward pressure on the current market price.
d. lower production during the next time period.

11.Suppose that the quantity of nursing services demanded exceeds the quantity of nursing services
supplied. The nursing wage rate will:
a. decrease.
b. increase.
c. not change.
d. none of the above.

12. Which of the following would cause an unambiguous decrease in the real price of DVD players?
a. A shift to the right in the supply curve for DVD players and a shift to the right in the
demand curve for DVD players.
b. A shift to the right in the supply curve for DVD players and a shift to the left in
the demand curve for DVD players.
c. A shift to the left in the supply curve for DVD players and a shift to the right in the
demand curve for DVD players.
d. A shift to the left in the supply curve for DVD players and a shift to the left in the
demand curve for DVD players.

13. From 1970 to 1993, the real price of a college education increased, and total enrollment increased.
Which of the following could have caused this increase in price and enrollment?
a. A shift to the right in the supply curve for college education and a shift to the left in
the demand curve for college education.
b. A shift to the left in the supply curve for college education and a shift to the
right in the demand curve for college education.
c. A shift to the left in the supply curve for college education and a shift to the left in the
demand curve for college education.
d. None of the above.

14. We observe that both the price of and quantity sold of golf balls are rising over time. This is due to:
a. continual improvements in the technology used to produce golf balls.
b. increases in the price of golf clubs over time.
c. decreases in membership fees for country clubs with golf facilities.
d. more stringent professional requirements on the quality of golf balls requiring
producers to use more expensive raw materials.

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15. After the September 11, 2001 attacks on the World Trade Center, the supply of downtown office
space in Manhattan was dramatically reduced. Forecasters predicted that the equilibrium price would
rise, but in fact the price fell. What are some factors that could explain the fall in the equilibrium price,
which the forecasters failed to take into account?
a. Demand for office space fell due to quality-of-life concerns.
b. The economic slowdown caused demand for office space to fall.
c. Both (a) and (b).
d. None of the above.

16.The income elasticity of demand is the


a. absolute change in quantity demanded resulting from a one-unit increase in income.
b. percent change in quantity demanded resulting from the absolute increase in
income.
c. percent change in quantity demanded resulting from a one percent increase
in income.
d. percent change in income resulting from a one percent increase in quantity
demanded.
e. percent change in income resulting from a one percent increase in price.

17.The price elasticity of demand for a demand curve that has a zero slope is
a. zero.
b. one.
c. negative but approaches zero as consumption increases.
d. infinity.

18.Elasticity measures
a. the slope of a demand curve.
b. the inverse of the slope of a demand curve.
c. the percentage change in one variable in response to a one percent increase
in another variable.
d. sensitivity of price to a change in quantity.

19.Which of the following represents the price elasticity of demand?


 Q 
 
 P 
a.
 P 
 
 Q 
 Q   P 
b.     
 P   Q 
 Q   P 
c.      correct answer
 P   Q 
 Q   P 
d.     
 P   Q 

20.A vertical demand curve is


a. completely inelastic.
b. infinitely elastic.
c. highly (but not infinitely) elastic.
d. highly (but not completely) inelastic.

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Managerial Economics supply demand elasticity

21.Which of these measures the responsiveness of the quantity of one good demanded to an increase in
the price of another good?
a. price elasticity.
b. income elasticity.
c. cross-price elasticity.
d. cross-substitution elasticity.

22.The cross-price elasticity between a pair of complementary goods will be


a. positive.
b. negative.
c. zero.
d. positive or zero depending upon the strength of the relationship.

Figure 1

23.Refer to Figure 1. At point A, demand is:


a. universally elastic.
b. inelastic, but not completely inelastic.
c. unit elastic.
d. elastic, but not infinitely elastic.
e. infinitely elastic.

24. Refer to Figure 1. At point B, demand is:


a. small.
b. inelastic, but not completely inelastic.
c. unit elastic.
d. elastic, but not infinitely elastic.
e. infinitely elastic.

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25.Refer to Figure 1. At point C, demand is:
a. completely inelastic.
b. inelastic, but not completely inelastic.
c. unit elastic.
d. elastic, but not infinitely elastic.
e. infinitely elastic.

26.Which of the following statements about the diagram below is true?

a. Demand is infinitely elastic.


b. Demand is completely inelastic.
c. Demand becomes more inelastic the lower the price.
d. Demand becomes more elastic the lower the price.

27.Which of the following pairs of goods are most likely to have a negative cross price elasticity of
demand?
a. hotdogs and hotdog buns.
b. Coke and Pepsi.
c. rail tickets and plane tickets.

28.For most consumer goods the own price elasticity of demand is


a. negative only when price decreases.
b. negative regardless of the direction of the price change.
c. positive only when price decreases.
d. positive regardless of the direction of the price change.

29.Suppose the demand for gourmet coffee can be represented by a linear demand curve. At the
prevailing market price the income elasticity of demand for gourmet coffee is 2. When income rises the
demand curve for gourmet coffee:
a. becomes less elastic at every price.
b. becomes less elastic at the price that prevailed before the change in income
c. becomes more elastic at every price
d. becomes more elastic at the price that prevailed before the change in income

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Managerial Economics supply demand elasticity

30.The introduction of refrigerators into American homes:


a. decreased the magnitude of the short run own price elasticity of demand for raw
meat.
b. did not affect the short run own price elasticity of demand for raw meat.
c. increased the magnitude of the short run own price elasticity of demand for
raw meat.
d. decreased the magnitude of the short run own price elasticity of demand for smoked
meats.

31.In the long run, new firms can enter an industry and so the supply elasticity tends to be
a. more elastic than in the short-run.
b. less elastic than in the short-run.
c. perfectly elastic.
d. perfectly inelastic.

32.This year a new oil field with substantial reserves has been discovered. Such discoveries are not
made every year. Therefore an increase in the demand for oil will:
a. increase the long run price of oil more than the short run price of oil.
b. increase the long run price of oil less than the short run price of oil.
c. ensure the long run price of oil and short run price of oil increase by the same
amount.
d. ensure that the short run price of oil falls.
e. ensure that the short run price of oil remains unchanged.

33.Which of the following results from a binding price floor?


a. Equilibrium.
b. Excess demand.
c. Excess supply.
d. Shortage.

34.The change in the price of one good has no effect on the quantity demanded of another good. These
goods are:
a. complements.
b. substitutes.
c. both inferior.
d. both Giffen goods.
e. none of the above.

35.The price of good A goes up. As a result the demand for good B shifts to the left. From this we can
infer that:
a. good A is a normal good.
b. good B is an inferior good.
c. goods A and B are substitutes.
d. goods A and B are complements.
e. none of the above.

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36. Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently
30,000 yachts per year. The government, in an attempt to raise revenue, places a $20,000 tax on each
yacht. Demand is highly, but not perfectly, elastic.
a. Q falls from 30,000; P rises by less than $20,000.
b. Q falls from 30,000; P rises by $20,000.
c. Q falls from 30,000; P does not change.
d. Q stays at 30,000; P rises by $20,000.
e. Q stays at 30,000; P rises by less than $20,000.
37. The own-price elasticity of the market demand for cigarettes is – 0.6. If the price falls by 5%, the
quantity demanded will change by (tick the right answer):
a. –3%,
b. +3%,
c. –1.2%,
d. +1.2%.

38. In 2002, Iraq's Kirkuk region exported 0.5-0.8 million barrels of crude oil per day (mpd) by pipeline to
the Turkish port of Ceyhan. Following the U.S.-led coalition attack against Iraq, the pipeline was
sabotaged. Western Europe refineries switched to buying oil from the Urals in Russia, shipped by tanker
from the Black Sea through the Bosporus and Dardanelles. However, by early 2004, the surge in
European demand and congestion in the Bosporus and Dardanelles had lifted spot tanker rates to 39,000
Euros per day (Source: “Bosporus Tanker Congestion Threatens Shortage of Oil”, Financial Times,
January 12, 2004.)
a. Using suitable demand and supply curves, illustrate the short-run effects of pipeline disruption on
the tanker services market.
Pipeline disruption increased the demand for tanker services. So your diagram should have 2
demand curves and a supply curve (and have axes, lines and equilibria carefully and correctly
labelled).
b. Using your diagram for (a), illustrate the long-run effects of the pipeline disruption.
In the long run, the price would be higher than the original equilibrium, but lower than €39,000
per day. The quantity of tanker services would be higher than in the short run equilibrium, and
in turn, higher than in the original equilibrium. Your diagram should have a long run supply
curve added: this would be more elastic than the short run supply curve and should pass
through the initial equilibrium point.
c. Are sunk costs larger in the transport of oil by pipeline or tanker?
. Clearly, pipeline.
d. In which market for transport of oil would prices be relatively more volatile: (i) pipeline or (ii)
tanker? Explain your answer.
Prices would be relatively more volatile in the market for oil transported by pipeline. With large
sunk costs, the supply would be inelastic and prices would fluctuate with the demand for oil
transportation.

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Managerial Economics supply demand elasticity

39. According to a study of U.S. cigarette sales, when the price of cigarettes was 1% higher, consumption
would be 0.4% lower in the short run and 0.75% lower in the long run. (Source: Gary Becker, Michael
Grossman, and Kevin Murphy, “An Empirical Analysis of Cigarette Addiction”, American Economic
Review, Vol. 84 No. 3, June 1994, 396-418.)
a. Calculate the short- and long-run own-price elasticities of the demand for cigarettes.
-0.4 and -0.75 respectively.
b. If the government were to impose a tax that raised the price of cigarettes by 5%, what would be the
effect on consumer expenditure on cigarettes in the (i) short run, and (ii) long run?
Using the elasticity estimates and formula, the change in quantity in the short and long run
would be -2% and -3.75% respectively. The percentage change in revenue is the sum of the
percentage changes in price and quantity: So it would be 3% in the short run and 1.25% in the
long run.

40. Suppose that, in Clintonville, most households were already recycling voluntarily with no user fee.
Then a user fee of $1 per container was imposed. Garbage disposal fell from 30 to 28 pounds per week
per household. What is the own-price elasticity of the demand for garbage disposal?
%ΔP = 1/[(1+0)/2] = 200%. %ΔQ = -2[(30+28)/2] = -6.9%. E = 0.035.

41. A retail bank's sources of funds include savings, time, and checking (current) deposits. In June 2011,
Hang Seng Bank, a leading Hong Kong bank, quoted interest rates of 0.01% on savings accounts, 0.15%
on a 12-month time deposit, and nothing on checking accounts.
a. Suppose that the bank incurs an additional 0.2% cost to administer checking accounts, and 0.1% cost
for savings accounts and time deposits. List the three sources of funds in ascending order of annual
cost per dollar of funds.
Savings accounts ($0.0011), checking accounts ($0.002), time deposits ($0.0025).
b. Suppose that the bank has $2 billion of savings deposits, $5 billion of time deposits, and $3 billion of
checking deposits. On a diagram with amount of funds in billions of dollars (from 0 to 10 billion) as
the horizontal axis and cost in millions of dollars as the vertical axis, illustrate the (i) average variable
cost of funds, and (ii) marginal cost of funds.
Quantit Total
y ($ bill cost ($
per mill per AVC ($ MC ($
month) month) mill) mill)
1 1.1 1.1 1.1
2 2.2 1.1 1.1
3 4.2 1.4 2.0
4 6.2 1.55 2.0
5 8.2 1.64 2.0
6 10.7 1.78 2.5
7 13.2 1.89 2.5
8 15.7 1.96 2.5
9 18.2 2.02 2.5
10 20.7 2.07 2.5

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42. Between 2008 and 2009, the average circulation of U.S. newspapers fell by 7%. The New York
Times suffered a relatively smaller decline, with weekday circulation falling 3.6% to 1,039,031. The
Times announced a quarterly loss of $74 million with a slight increase in circulation revenue due to a
price increase in 2008 from $1.25 to $1.50. In early May 2009, it was reported that the Times would
raise its weekday price from $1.50 to $2 and that the price increase would raise revenue by $40 million.
(Source: “New York Times set to increase price”, Financial Times, May 2, 2009).
a. Using the 2008 price and circulation information, calculate the price-elasticity of demand for the
New York Times weekday edition.
%ΔP = (1.50 – 1.25)/[(1.50+1.25)/2] = 18.18% (to 2 decimal places). %ΔQ = -3.6%. E = -0.198.
b. At the current circulation of say 1.04 million and price of $1.50, and assuming 300 weekdays a year,
what is the New York Times’ current annual revenue from weekday sales?
Current annual revenue from weekday sales is 1.04 x $1.50 x 300 million = $468 million.
c. Consider the expected 2009 price increase from $1.50 to $2. What is the percentage change in
price?
28.57% (correct to 2 decimal places)
d. Suppose that the expected 2009 price increase from $1.50 to $2 does indeed yield $40 million in
incremental revenue. What is the percentage change in revenue over your answer in (b)?
%ΔR = (40)/[(468+508)/2] = 8.2% (to 2 decimal places). If you only look at initial revenue then the
percentage change is 40x100/468 = 8.55%.
e. Substitute the percentage changes from (c) and (d) into the following rule: percentage change in
revenue = percentage change in price + (price-elasticity of demand x percentage change in price).
Calculate the price-elasticity of demand which would imply the $40 million increase in revenue.
%ΔR = %ΔP + (E x %ΔP) = 8.2 = 28.57+ (E x 28.57). So E = -0.713.

f. Compare the elasticity from (e) at a price of $1.50 with the elasticity from (a) at a price of $1.25.
Does the difference in elasticities seem reasonable?
Yes. At a higher price demand should be more elastic (but still inelastic).

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Managerial Economics supply demand elasticity

43. (Png) This question applies the techniques discussed for calculating equilibrium changes. Own price
and income elasticities of demand for gasoline are -0.36 and 0.52 respectively. Supply elasticities with
respect to price and labor wages are 0.54 and -0.04 respectively. If that the price of gasoline is $1 per
gallon, and sales are 600 million gallons a year, what will be the effect on the market price and quantity:
a. If income rises by 6%.
This implies a demand increase (demand shifts right).
Step 1: Demand change: %ΔQ = (%ΔQ due to income increase)+(%ΔQ due to price increase) =
(0.52x6)+(-0.36x%ΔP)
Step 2: Supply change: %ΔQ = 0.54x%ΔP
Step 3: Equate the changes in supply and demand and solve for %ΔP: 3.12-0.36x%ΔP=0.54x%ΔP.
So %ΔP = 3.47%. Price increases from $1 per gallon to between $1.03 and $1.04 per gallon, say
$1.035.
Step 4: From the supply (or demand) equation, %ΔQ = 0.54x%ΔP = 0.54x 3.47 = 1.87%. So sales
rise from 600 million gallons per year to 611.22 million gallons per year.
b. If wages rise by 15%.
This implies a supply decrease (supply shifts left)
Step 1: Demand change: %ΔQ = (%ΔQ due to price increase) = (-0.36x%ΔP)
Step 2: Supply change: %ΔQ = 0.54x%ΔP+(%ΔQ due to wage increase) = 0.54x%ΔP + (-0.04x15)
Step 3: Equate the changes in supply and demand and solve for %ΔP: -0.36x%ΔP=0.54x%ΔP-0.6.
So %ΔP = 0.67%. Price increases from $1 per gallon to around $1.007 per gallon.
Step 4: From the demand equation, %ΔQ = -0.36x%ΔP = -0.36x0.67 = - 0.24%. So sales fall from
600 million gallons per year to 598.56 million gallons per year.
c. If both changes (a) and (b) occur.
Simply add up the price and quantity increases. %ΔP = 3.47+0.67 = 4.14%. and %ΔQ = 1.87- 0.24 =
1.63%. This means price rises to $1.041 a gallon while quantity rises to 609.78 million gallons per
year.
44. The market demand curve for Potato chips has been estimated to have the equation
Q = 1000 – 0.2P + 3Y – 10B + 5R
Where Q is the quantity demanded of potato chips (in ‘000 cartons per week),
P = 250 is the price of potato chips (in rupees per carton),
Y = 500 is the per capita income of consumers (in rupees per week)
B = 50 is the price of beer (in rupees per bottle)
And R = 10 is the price of roast peanuts (in rupees per packet).
a. Calculate the demand elasticities for potato chips with respect to (i) own price, (ii) income, (iii) the
price of beer and (iv) the price of roast peanuts.
First, Q = 1000 – (0.2x250)+(3x500)-(10x50)+(5x10) = 2000 (or 2 million cartons per week).
Own price: -0.2x(250/2000) = -0.025. Income = 3x(500/2000) = 0.75. Beer = -10x(50/2000) = -0.25.
Peanuts = 5x(10/2000) = 0.025
b. Is demand for potato chips price elastic or inelastic? Inelastic
c. Is demand for potato chips normal or inferior? Normal
d. Are potato chips and beer complements or substitutes? Complements. What of chips and peanuts?
Substitutes.
e. If the price of peanuts increases by 50% by what percent will demand for chips change?

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%ΔQ = 0.025x50 = 1.25% or 2 million, 25 thousand cartons per week.

45. The competitive market for wheat flour (atta) in India is initially in long run equilibrium. Analyse the
impact of each of the following events and the subsequent adjustment back to equilibrium in the short
and the long run. Use appropriate two panel diagrams for your analysis (different diagrams for each
event).
a. Pests destroy a large percentage of the wheat crop in Punjab.

Rs per unit of Rs per unit of S1


output output

S0 = S 2
MC Long Run
Supply

AC

q0 q1 Output per period Q1 Q0 Output per period


The pest attack causes short run supply to shift from S 0 to S1 driving up the price of wheat. Farms that
remain in operation make positive economic profits in the short run and increase output (to the extent
possible) from q0 to q1. However, total supply decreases from Q 0 to Q1 due to the large number of farms
that are compelled to “shut down”. In the long run, supply returns to its normal situation (S 0 = S2) where
farms are making zero economic pri=ofut and producing, on average, q 0 each.

b. Demand for ready-made, packaged frozen chapatis increases sharply due to urbanization and
growing numbers of unmarried employees.

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Managerial Economics supply demand elasticity

12
1. Which of the following will cause the demand curve for Beatles' compact discs to shift to the
right?
a. An increase in the price of the discs.
b. A decrease in consumers’ incomes.
c. An increase in the price of Phil Collins’ latest compact disc (a substitute).
d. All of the above.
e. None of the above.

2. If the actual price were below the equilibrium price in the market for bread, a
a. surplus would develop that cannot be eliminated over time.
b. shortage would develop, which market forces would eliminate over time.
c. surplus would develop, which market forces would eliminate over time.
d. shortage would develop which market forces would tend to exacerbate.

3. Use the following statements to answer this question.

I. Even though people need water to survive, the price of water is less than the price
of diamonds because water is in greater supply than diamonds.
II. Suppose that the demand for corn is highly price inelastic. If every corn farmer's
harvesting technologies become more efficient, the total revenue received by all
corn farmers would fall.
a. I and II are true.
b. I is true, and II is false.
c. II is true, and I is false.
d. I and II are false.

4. Due to capacity constraints, the price elasticity of supply for most products is:
a. the same in the long-run and the short-run.
b. greater in the long-run than the short-run.
c. greater in the short-run than in the long-run.
d. too uncertain to be estimated.

5. Due to capacity constraints, the price elasticity of supply for most products is:
e. the same in the long-run and the short-run.
f. greater in the long-run than the short-run.
g. greater in the short-run than in the long-run.
h. too uncertain to be estimated.

6. In the long run, new firms can enter an industry and so the supply elasticity tends to be
e. more elastic than in the short-run.
f. less elastic than in the short-run.
g. perfectly elastic.
h. perfectly inelastic.

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Managerial Economics supply demand elasticity

7. A freeze in Florida’s orange growing regions will:


a. result in a sharp increase in the price of oranges in the short run because
demand and supply are highly inelastic.
b. result in a sharp increase in the price of oranges in the short run because demand
and supply are highly elastic.
c. result in a sharp decrease in the price of oranges in the short run because demand
is highly inelastic and supply is highly elastic.
d. result in little change in the price of oranges in the short run because supply is
infinitely elastic.

8. Use the following two statements to answer this question:

I. The supply of newly mined copper is more elastic in the long run than in the short
run.
II. The supply of scrap copper is more elastic in the short run than in the long run.
a. Both I and II are true.
b. I is true, and II is false.
c. I is false, and II is true.
d. Both I and II are false.

9. The demand for a bushel of wheat in 1981 was given by the equation QD = 3550  266 P . At a
price of $3.46 per bushel, what is the price elasticity of demand? If the price of wheat falls to
$3.27 per bushel, what happens to the revenue generated from the sale of wheat?

Solution: At a price of $3.46 per bushel, the quantity demanded for wheat is 2,629.64
bushels of wheat. At a price of $3.27 per bushel, the quantity demanded for wheat
is 2,680.18. The price elasticity of demand at $3.46 is
�P �
� Q � � 3.46 � �50.54 �
ED = � � � �= � �
� �= 0.35. At a price of $3.46 per bushel, the
�Q ��P � �2, 629.64 �
�0.19 �
revenue generated from the sale of wheat is $12,558.554. At a price of $3.27 per
bushel, the revenue generated from the sale of wheat is $8,764.1886. Wheat
revenue drops by $3,794.366 when price decreases from $3.46 to $3.27 per bushel.

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10. Midcontinent Plastics makes 80 fiberglass truck hoods per day for large truck manufacturers. Each
hood sells for $500.00. Midcontinent sells all of its product to the large truck
manufacturers. If the own price elasticity of demand for hoods is -0.4 and the price
elasticity of supply is 1.5.
a. Compute the supply and demand for truck hoods.
b. If the local county government imposed a per unit tax of $25.00 per hood
manufactured, what would be the new equilibrium price of hoods to the truck
manufacturer?
c. Would a per unit tax on hoods change the revenue received by Midcontinent?

Solution:
Given: P* = $500 Q* = 80 hoods per day
Ed = -0.40 Es = 1.5
a. Demand: Qd = aO + a1P Supply: Qs = bO + b1P

P Q
Use: E =  to compute a1 and b1.
Q P
500 500
 0.4 = a1 1.5 = b1
80 80
a1 = -0.064 b1 = 0.24
Solve for a0 and b0
Qd = aO + a1P Qs = bO + b1P
80 = aO + -0.064(500) 80 = bO + 0.24(500)
ao = 112 bo = -40
Qd = 112 - 0.064P Qs = -40 + 0.24P
b. The tax represents a price increase to the purchaser regardless of the current price.
Thus, the supply curve will be adjusted vertically upward by $25.
Qs = -40 + 0.24P or
P = 166.67 + 4.17 Q s, then
Pt = P + $25 = 166.67 + 25 + 4.17Q s
Pt = 191.67 + 4.17Qs or
Qs = -45.96 + 0.24P
The new equilibrium price will be:
New Supply = Demand
Qs= -45.96 + 0.24P = 112 - 0.064P = Q d
Solving yields P = $519.60 per truck hood
c. Since the new selling price in (c) is $519.60 and the tax is $25 per hood,
Midcontinent would receive only $494.6 per hood. As quantity sold has fallen too,
revenues would fall.

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