ECON 202  – Calculate price elasticity of demand

Subject: Economics    / General Economics
Question
Homework 3
Econ 201
Instructions
It is expected that you will either turn in the homework in person in class, or a hardcopy to the instructor’s
mailbox. No electronic submissions will be accepted.
Question
1. The market for milk has a demand curve given by P = 150 ? .03QD .
(a) (10 points) What is the price elasticity of demand at QD = 100.
(b) (5 points) What is the price elasticity of demand at QD = 1000.
(c) (5 points) Using the concept of declining marginal rate of substitution, explain why the elasticity
changes in this way when quantity demanded increases.
2. Use the figure (a) (5 points) If each square represents $2 in price and 4 units of quantity, what is the price elasticity
of demand at point D?
(b) (10 Points) Without doing any calculations, is the price elasticity of demand more or less elastic
at point B than point D? Explain your answer.
(c) (10 Points) On the demand curve represented by P1 Q1 , at what point is demand unit elastic?
(d) (5 Points) Rank the absolute value of the price elasticity of demand at points A-E from most
elastic to least elastic. 1 3. Boris budgets $40/week for his morning coffee with milk. He likes it only if it is prepared with 3 parts
coffee, 2 part milk U = min{ 32 M, C}. Coffee costs $2/oz, milk $1/oz.
(a) (10 Points) How much coffee and how much milk will Boris buy per week?
(b) (10 Points) How much coffee and how much milk will Boris buy per week if the price of coffee
rises to $6/oz?
(c) (5 Points) Graph the two budget constraints and the two optimal bundles with coffee on the
x-axis. On the graph, show how much of the total change is due to the income effect? How much
to the substitution effect?
4. Use the figures below to answer the following questions: (a) (10 Points) If the composite good costs $1, what is the price of good x in each of the three budget
lines?
(b) (7.5 Points) Draw the income and substitution effects of a price decrease from the most expensive
to the second most expensive on the figure above.
(c) (7.5 Points) Draw the income and substitution effects of a price increase from the lease expensive
to the most expensive in the figure below. 2 3