Assignment:
Part I. Supply-Demand Analysis
On Sunday, September 30, the Los Angeles Angels and the Texas Rangers played baseball at Rangers Ballpark in Arlington. Both teams were in pursuit of league championships. Tickets to the game were sold out, and many more fans would have attended if additional tickets had been available. On that same day, the Kansas City Royals and the Cleveland Indians played each other and sold tickets to only 18,099 people in Cleveland. The Indians stadium, Progressive Field, holds 43,545. Rangers Ballpark in Arlington holds 49,170. Assume for simplicity that tickets to all regular-season games are priced at $40.
a. Draw supply and demand curves for the tickets to each of the two games. (Hint: Supply is fixed. It does not change with price.) Draw one graph for each game.
b. Is there a pricing policy that would have filled the ballpark for the Cleveland game?
c. The price system was not allowed to work to ration the Texas tickets when they were initially sold to the public. How do you know? How do you suppose the tickets were rationed?
Part II. Elasticity
For each of the following scenarios, decide whether you agree or disagree and explain your answer. Make sure that your explanation is enough to make your points clear.
a. If the elasticity of demand for cocaine is -0.20 and the Drug Enforcement Administration succeeds in reducing supply substantially, causing the street price of the drug to rise by 50%, buyers will spend less on cocaine.
b. Every year Christmas tree vendors bring tens of thousands of trees from the forests of New England to New York City and Boston. During the last two years, the market has been very competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was -1.3, vendors would lose revenues altogether as a result of the price decline.
c. If the demand for a good has unitary elasticity, or elasticity is -1, it is always true that an increase in its price will lead to more revenues for sellers taken as a whole.