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SE201: PRINCIPLES OF MICROECONOMICS

Assignment5:DueWednesday9/23/15

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Read Chapters 4 and 5 of your textbook. Answer the following questions that cover supply,
demand, and price elasticity.
1. Suppose that business travelers and vacationers have the following demand for airline
tickets from New York to Boston:
Price
$150
$200
$250
$300

Quantity Demanded
(business travelers)
2,100 tickets
2,000 tickets
1,900 tickets
1,800 tickets

Quantity Demanded
(vacationers)
1,000 tickets
800 tickets
600 tickets
400 tickets

a. As the price of tickets rises from $200 to $250, what is the price elasticity of
demand for (i) business travelers and (ii) vacationers?
For business travelers, the price elasticity of demand when the price of tickets
rises from $200 to $250 is [(2,000 1,900)/1,950]/[(250 200)/225] = 0.05/0.22
= 0.23. For vacationers, the price elasticity of demand when the price of tickets
rises from $200 to $250 is [(800 600)/700] / [(250 200)/225] = 0.29/0.22 =
1.32.
b. Why might vacationers have a different elasticity from business travelers?
The price elasticity of demand for vacationers is higher than the elasticity for
business travelers because vacationers can choose a substitute more easily than
business travelers. For example, vacationers can choose a different mode of
transportation (like driving or taking the train), a different destination, a different
departure date, and a different return date. They may also choose to not travel at
all. Business travelers are less likely to do so because their schedules are less
adaptable.

2. Assume the U.S. corn market is perfectly competitive and the yearly (inverse) market
demand for corn is approximated by:
P 11 0.2Q

where P is the price per bushel, and Q is the total yearly quantity demanded (in billions of
bushels). The inverse supply of corn is given by:
P 1 0.3Q

Given the information above, answer the following questions:

a) Calculate the price elasticity of demand at P = $9, Q = 10. Is demand price elastic,
price inelastic, or unit elastic at this point?
Price elasticity of demand

P
1
9
1
*

*
4.5
Q slope 10 0.2

Demand is price elastic at this point.

b) Calculate the price elasticity of supply at P = $4, Q = 10. Is supply price elastic, price
inelastic, or unit elastic.
Price elasticity of supply

P
1
4
1
*

*
1.33
Q slope 10 0.3

Supply is price elastic at this point.

c) Sketch the (inverse) demand and supply curves and calculate the free market
competitive equilibrium price and quantity of corn in this market.
Set the right-hand-side of the supply and demand equations equal and solve for Q e.
11 0.2Q = 1 + 0.3Q
10 = 0.5Q
QE = 20 billion bushels
PE = (11 0.2*20) = $7 per bushel