Exercise 2

2.1. College Enrollment and Apartment Prices

Consider a college town where the initial price of rental apartments is $400 and the
initial quantity is 1,000 apartments. The price elasticity of demand for apartments is
1.0 and the price elasticity of sully of apartments is 0.5.
a. Use demand and supply curves to show the initial equilibrium, and label the
equilibrium point a.
b. Suppose that an increase in college enrollment is expected to increase the
demand for apartments in college town by 15 percent. Use your graph to show
the effects of the increase in demand on the apartments market. Label the new
equilibrium point b.
c. Predict the effect of the increase in demand on the equilibrium price of
apartments.

a. P S
$ D’
D
440 B
400 A

0 1000 Q

The initial demand equation is: P= a-b.Qd

Since Ep= Q’p. ( P/Q)  Ep= ( a-b.Qd)’.P/Q Ep= -b. P/Q
 b= P/ (Q.Ep)  b= 400/(1000.1) = 0.4
 P= a-b.Qd  400= a- 0.4.1000  a=800
 The demand equation is: P= 800- 0.4.Qd
The demand curve will intersect the supply curve at a price of $400 and a quantity of
1000.
b. An increase in college enrollment is expected to increase the demand for
apartments in college town by 15 percent .
The demand curve will shift to the right resulting in a new equilibrium with a higher
price and a higher quantity.
c. Predict the effect of the increase in demand on the equilibrium price of
apartments:
Percentage change in euilibirum price = %15 / ( 1+ 0.5) = 10%
So, if an increase in college enrollment is expected to increase the demand for
apartments in college town by 15 percent, new equilibrium price of apartments is:
400. ( 100% + 10%) = 440 ($)
The initial demand equation is: P= 800- 0.4.Qd
 The after demand equation is: 1.1P= 800 – 0.4x 1.15.Qd
 P= 800/11 -23/50.Qd

2.2 Regulations and Price of Housing

Suppose local building regulations increase the cost of building new houses,
decreasing supply by 12 percent. The initial price of new housing is $200,000, the
price elasticity of demand is 1.0, and the price elasticity of supply is 3.0. Predict what
is the effect of the regulations on the equilibrium price of new housing. Illustrate your
answer with a graph that shows the initial point (a) and the new equilibrium (b).
Percentage chande in equilibrium pice : -(-12%) / ( 1+3)= 3%
New equilibrium price of new housing : 200,000. ( 100%+3%)= 206,000 ($)

When there is a decrease in supply, the supply curve will shift to the left.

P D
S’
$
B S
206,000

200,000

0
Q
2.3 Import Restrictions and the Price of Steel
Suppose import restrictions on steel decrease the supply of steel by 24 percent.
The initial price of steel is $100 per unit, the elasticity of demand is 0.7, and the
elasticity of supply is 2.3. Predict what is the effect of the import restrictions on the
equilibrium price of steel. Illustrate your answer with a graph that shows the initial
point (a) and the new equilibrium (b).
Percentage change in equilibrium price = −(−24) / (0.7+2.3)= 8%
New equilibrium price of steel: 100 x (100% + 8%) = 108($).
When there is a decrease in supply, the supply curve will shift to the left.
P D
S’
B
108 S

100
A

0
Q