ECN 502 Essay example

1162 Words Nov 20th, 2013 5 Pages
1) Problem 6: Suppose demand and supply are given by Qd = 60 – P and Qs = P – 20.
a) What are the equilibrium quantity and price in this market?
b) Determine the quantity demanded, the quantity supplied and the magnitude of the surplus if a price floor of \$50 is imposed in this market.
c) Determine the quantity demanded, the quantity supplied and the magnitude of the shortage if a price ceiling of \$32 is imposed in this market.

Solution:
a. For the equilibrium
i) Price: Qd = Qs
60-P=P-20 => P= \$40. ii) Quantity: Equilibrium quantity can be found substituting the value of P found in (i).
Q = 60-40 = \$20

b. i) Quantity Demanded = Qd= 60-50= 10 ii) Quantity supplied = Qs= 50-20 = 30 iii) Magnitude of surplus =
Solution:
From the concept of income elasticity we know that Ei = % Change in Quantity / % change in Income.

So, 2.6 = % Change in demand/ 6% => % change in Demand = 15.6%.

So with 6% change in consumer income, we expect an increase of 15.6% increase in demand. 15) You are a division manager at Toyota. If your marketing department estimates that the semiannual demand for the Highlander is Q = 150000 – 1.5P, what price should you charge in order to maximize revenues from sales of the Highlander?

The graph of this equation can be as below:

When the price is \$0, 150000 units can be sold, where as at price \$100000, we are expected to sell 0 units. Which gives the coordinates as (0,150000) & (100000,0)

Toyota can earn maximum revenue at mid pint of this
Curve when value of elasticity is 1.
Midpoint (Q,P) = (75000,50000)

So Toyota can earn maximum revenue from Highlander
If a price of \$50,000 is charged.

1. Solve also the following problem:
Read the gasoline article ‘Why the Tepid Response to Higher Gasoline Prices?’ uploaded on Blackboard, and answer the following questions:
1) What are the (research-based) estimates of the short-run and long-run price elasticity of demand for gasoline?
2)

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