Homework #2 Intermediate Microeconomics ECON 302, Section 001

Homework #2
Intermediate Microeconomics ECON 302, Section 001
Due: Wednesday, September 21st, 2016 at 8:00AM
1. (1 Point) Please initial that you understand each of the following statements. Failure to complete this
will result in a one point deduction.
____ The assignment is open book/open note. Students may discuss this assignment with other
students in the class, but must turn in legible, handwritten, and original answers. The posting of
questions from this assignment to an online forum like Chegg, Coursehero, or Homeworkmarket will be
considered cheating. Answers closely matching replies to such a post will be scrutinized. Students
caught cheating will receive a zero on the assignment and may receive additional punishment under
Faculty Senate Rule 49-20.
____ This assignment must be turned in at the beginning of class on Wednesday, September 21st. It
will be considered late once the instructor starts lecturing. Late assignments will not be accepted and
students will receive a score of zero on that assignment.
____ All work must be stapled, in the proper order, in the upper-left corner of the paper prior to being
submitted. Two points will be deducted if the instructor staples or restaples the work for you.
____ Your name and Penn State Email must appear at the top of the first page.
____ Be sure to fully answer the entire question. Some questions have multiple parts which ask you to
explain your reasoning. Providing the correct answer without an explanation (when asked for) will not
earn students full credit.
___ Numbers should be rounded to two decimal places if needed.
2. Assume the market demand for a product is
QD ? 2,000 ? 0.5P
and the market supply is
QS ? 2P? 1,000.
A. (4 Points) Solve for the market equilibrium price and quantity.
Price = __________
Quantity = __________
B. (2 Points) Calculate the price elasticity of demand at the market equilibrium.
Price Elasticity of Demand = _____________
C. (2 Points) State two general, algebraic definitions for the price elasticity of supply:
Definition #1:
Definition #2:
D. (2 Points) Calculate the value of the price elasticity of supply at the market equilibrium.
Price Elasticity of Supply = _________________
E. (1 Point) Will total revenue for a firm selling this product increase or decrease if it raises the price of
the product above the equilibrium price?
CIRCLE ONE: INCREASE DECREASE
F. (2 Points) Justify your answer for Part E.
G. (2 Points) At what specific point on the demand curve will total revenue be maximized?
Price = __________
Quantity = __________
3. Assume the market demand for pizza is expressed by the following equation:
Qd = 75 – 2P + 0.5*PSUBS + 0.1*WAGE
Assume the key variables take the following values:
P = $20
PSUBS = $4
WAGE = $10
A. (2 Points) Calculate the price elasticity of demand at the given values.
B. (2 Points) Calculate the income elasticity of demand at the given values.
C. (2 Points) Calculate the cross-price elasticity of demand with respect to subs at the given values.
D. (2 Points) Use your calculations from Parts B and C to describe pizzas in terms of being a normal or
inferior good and a complement or substitute to subs.
E. (2 Points) Continue to assume that the price of pizza (P) and the price of subs (PSUBS) enter the
equation linearly with their current coefficients. Now rewrite the demand equation to show that pizzas
are a normal good for wages up to $10, but inferior for all wages higher than $10.
Qd = _________________________________________________
4. (4 Points) Assume that a consumer has $1,000 to spend on two products (X and Y) which have prices
PX = $2 and PY = $5. Use the axes below to graph the initial budget constraint in X and Y space. Now
assume that PY decreases to $4. Draw the new budget constraint on the same set of axes.