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Demand, Supply and Elasticity: Applications and Exercises

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Demand, Supply and Elasticity: Applications and Exercises Lecture 3 academic year 2014/15 Introduction to Economics Fabio Landini Ex. 3.1 The lottery Question ... – PowerPoint PPT presentation

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Title: Demand, Supply and Elasticity: Applications and Exercises


1
Demand, Supply and Elasticity Applications and
Exercises
  • Lecture 3 academic year 2014/15
  • Introduction to Economics
  • Fabio Landini

2
Ex. 3.1 The lottery
  • Question
  • Suppose you win 100 at the lottery. You can
    spend all the money in beers or invest them at
    5. How much does it cost to spend the money you
    win in beers?
  • Hint Reason in terms of opportunity cost

3
Ex. 3.2 Product development
  • Question
  • A company invested 5 mln. to develop a new
    product, expecting an equal return from the
    investment.
  • Problem 5 mln are not enough to complete the
    product, 1 mln is needed.
  • Moreover competition reduces the expectation
    reduces the expectations to just 3 mln sales.
  • Is it more convenient to stop or to continue the
    commercialization of the product?
  • Hint Reason in terms of MB vs. MC

4
Ex. 3.3 Demand and Supply I
  • Question
  • Use the Demand Supply model to answer the
    following questions
  • When a chill hits Sicily, what happens to the
    price of oranges in Italy? Increases or decrease?
  • When UK benefits of a mild winter, what happens
    to the price of hotel rooms in Costa Brava?
    Increase or decrease?
  • When a war breaks out in Middle East, what
    happens to the price of petrol an second-hand
    Cadillac in US? Increase or decrease?

5
Ex. 3.4 Demand and Supply II
  • Question
  • The market for cheese is characterized by the
    following demand and supply curve
  • Demand QD 9 P
  • Supply QO 3P 3
  • where P represent the price (in Euro per Kg.) and
    Q represent the quantity (in Kg.).
  • How do the demand curve and supply curve look
    like (draw)? Which is the value of the
    equilibrium prices and quantities?

6
Ex. 3.5 Elasticity I
  • If the variation in quantity is smaller than
    the decrease in price, the value of E(p) is
  • gt 1
  • lt 1
  • 1.
  • If the quantity demanded is constant after a
    change in the level of price, the value of E(p)
    is
  • gt 1
  • lt 0
  • none of the above.

7
Ex. 3.6 Elasticity II
  • For each of these pair of goods say which good
    has the most elastic demand?
  • Textbooks vs. Science fiction books
  • Answer Science fiction books, because they are
    luxury goods. Textbooks are necessary for most
    young people
  • b) Beethovens CD vs. Classical CD in general
  • Answer Beethovens CD. Beethoven and Brahms are
    closer substitute than a classical and a jazz CD

8
Ex. 3.6 Elasticity II
  • (c) Fuel in the short period (6 months) vs.
    petrol in the long period (5 years)
  • Answer Petrol in the long period. In the short
    period D for fuel in inelastic, it is determined
    by the technological conditions (given cars and
    industry) and weather (heating). In the long
    period D for fuel is instead relatively elastic
    (technological constraint are lessened)
  • (d) Beer vs. water
  • Answer Beer. Water is a necessary goods, whereas
    beer is a luxury goods (it has many substitutes)

9
Ex. 3.7 Travellers
  • Hp. business men and tourists have the
    following demand for flight tickets on route New
    York-Boston

Price Qd Business men Qd - Tourists
150 2100 1000
200 2000 800
250 1900 600
300 1800 400
10
Ex. 3.7 Travellers
  • Question
  • 1) Compute the elasticity for the two categories
    of travellers
  • 2) Which one of the two categories is
    characterized by a less elastic demand? Why?

11
Ex. 3.8 Tom Jerry
  • Question
  • Tom and Jerry go to the petrol station. Tom
    always demand 10 litres without even looking at
    the price. Jerry always demand 10 euro of petrol.
    Which is Toms and Jerrys ED(p) ?
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