Indian Institute of Technology Kanpur

Department of Humanities and Social Sciences

ECO101A Introduction to Economics (2014-15-II)
Instructor: Dr. P. Kulshreshtha
PRACTICE PROBLEM SET # 4
Note:

There are 5 questions in this problem set, to be discussed in the tutorial class.
As far as possible, complete answers should be given.
Quality of reasoning provided is very important.
Make all necessary mathematical derivations to support your reasoning.
Draw graphs, if necessary.
Show all of your steps and work (including calculations) clearly.

1. Using the demand-supply model, analyze the impact the following changes on the
equilibrium price and quantity in a market/industry, with the help of suitable graphs:
(a) A simultaneous rise in the rental cost/price of capital and decline in consumer
incomes.
(b) A simultaneous rise in the fashion for Being Human T-Shirts and an innovation in
their production technology.
(c) A simultaneous rise in the price of a complement of Tea (Sugar) and a decrease in the
wage rate of Tea workers.
(d) A simultaneous rise in the price of a substitute of Coffee (Tea) and a rise in the price
of land used for production of Coffee.
2. The demand and supply schedules in the market for eggs are as follows:
Price per
dozen
(in Rs.)
2.00
3.00
4.00
4.50
5.00
6.00
7.00

Quantity demanded
(thousand dozen per
month)
110.0
90.0
70.0
60.0
50.0
30.0
10.0

Quantity supplied
(thousand dozen per
month)
22.5
37.5
52.5
60.0
67.5
82.5
97.5

Excess demand
(thousand dozen
per month)

(a) Based on the above schedules, what is the excess demand for eggs at each price? (Fill
the last column of the above table appropriately.)
(b) What is the equation of the demand curve for eggs? What is the equation of the supply
curve for eggs?
(c) What are the equilibrium price and quantity in the market for eggs? What is the price
elasticity of demand for eggs at the market equilibrium point?
3. Ranjana has an yearly (or annual) income of Rs. 20,000. The quantity of textbooks that
she purchases in a year is always inversely proportional to the price of textbooks,
ceteris paribus (Assume that the quantity of textbooks is divisible). What does
Ranjanas demand curve for textbooks look like? What is Ranjanas price elasticity of
demand for textbooks?
(P. T. O)
1

4. (The Geometric Formula to compute Point Price Elasticity of Demand (ep) for
Linear Demand; Due to Alfred Marshall, one of the founders of modern economics,
published in his textbook Principles of Economics (1890)) Suppose that the demand
curve for a commodity is linear. Consider the graph drawn below that illustrates the
demand curve for the commodity:
Price
A

D (Demand)

Quantity

Let |epE| be the modulus, or the absolute value of the point price elasticity of demand
for the commodity at point E in the graph above. Prove that: (i) | epE | = OP/AP,
(ii) |epE | = BQ/OQ and (iii) | epE | = BE/AE = Lower Segment at E/Upper Segment at E
5. (The Arc Method to compute price elasticity of demand):
ARC PRICE ELASTICITY OF DEMAND
epAB = epBA

P1 P0

(Q1 - Q0) 2
=
(P1 - P0) Q1 Q0

(Q1 - Q0) (P1 P0)

(P1 - P0) (Q1 Q0)

P0

P1

D (Demand)

Q0

Q1

QD
(P. T. O)
2

Now, consider Ranjanas demand curve in Question 3 above. Suppose that Ranjana spends
one-fourth of her income on textbooks. Compute Ranjanas arc price elasticity of demand
along the arc AB, where A = (Q0, P0) = (10, 500) and B = (Q1, P1) = (15, 1000/3).

ENJOY!