EC 203

PS: CH 15

FALL 2005

1. If the demand curve is a linear function of price, then the price elasticity of demand is the same at all prices. FALSE 2. The demand for tickets to a rock concert is given by D(p) = 200,000 - 10,000p, where p is the price of tickets. If the price of tickets is $17, then the price elasticity of demand for tickets is -5.67 3. The demand function for small business computers in the United States is given by x = 200 - 10p, where x is annual sales measured in thousands of computers and p is the price of a computer measured in thousands of dollars. Japanese firms supply a big share of these computers. They measure prices in yen where 150 yen equal 1 dollar. The price of 1 computer is $10,000. Let Eu be the price elasticity of demand at this price as calculated by US firms who measure in dollars, and let Ej be the price elasticity of demand at the same $10,000 price but measured in yen by the Japanese firms. What are the values of Eu and Ej? -1, -1 4. At the price of $100, tourists demand 237 airplane tickets. At the same price, business travelers demand 247. At the price $110, tourists demand 127 tickets and business travelers demand 127. Assuming that the demand curves of business travelers and tourists are both linear over this price range, what is the price elasticity of demand at the price $100? -4.75 5. Rollo would love to have a Mercedes. His preferences for consumption in the next year are represented by a utility function U(x, y), where x = 0 if he has no Mercedes and x = 1 if he has a Mercedes for the year and where y is the amount of income he has left to spend on other stuff. If U(0, y) = the square root of y and U(1, y) = (10/9)(y5) and if Rollo's income is $50,000 a year, how much would he be willing to pay per year to have a Mercedes? $9,500 6. Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff, Ethel's utility function is U(x, y), where U(0, y) = y1/2, U(1, y) = (15/14)y1/2, and U(2, y) = (10/9)y1/2. Suppose that it costs $2,000 a year to have 1 car and $4,000 a year to have 2 cars. Ethel finds that the right thing to do depends on her income. a. What is her willingness to pay for 1 car if her income is M? b. What is the lowest income at which she would have a car? c. What is the lowest income at which she would have 2 cars? a. Her willingness to pay for 1 car is about 0.129M, where M is her income. b. The lowest income at which she would get a car is $15,504. c. If we solve the equation U(1, y - 2,000) = U(2, y - 4,000), we find $55,143. At incomes above that she prefers 2 cars; below that she would be better off to have 1 car.

7. In Tassel, Illinois (pop. 20,000), there are two kinds of families, those who like swimming pools and those who don't. Half of the population is of each type. Families who like swimming pools are willing to spend up to 5% of their income each year on a swimming pool. Families who don't like them would pay nothing for a swimming pool. Nobody wants more than one swimming pool and nobody has thought of sharing a swimming pool. Incomes in Tassel range between $10,000 and $110,000. For incomes M in this range, the number of families in Tassel with income greater than M is about 22,000 -0.2M. (The two types of families have the same income distribution.) Find the aggregate demand function for swimming pools in Tassel (demand for swimming pools as a function of the annual cost of having one). The number of people willing to pay at least p is half of the number who have income at least $20p. Therefore the aggregate demand function is 11,000-2p.