Intermediate Microeconomics without Calculus Problems
1. Elasticities
Consider the following supply and demand functions
qD = 12 - 3p
qS = -3 + 2p
a) Plot the supply and demand functions.
b) What are the equilibrium price and quantity?
c) At the equilibrium price and quantity, what is the price elasticity of demand?
d) Interpret the price elasticity of demand. How much will quantity change if the price increases by 1%?
e) Suppose I were to calculate an income elasticity of # = 0:5. What does this imply about the good in our market?
f) Suppose there were another good in our market and I calculated a cross-price elasticity of εt = -1:2. What does this imply about the relationship between both goods?
2. Market Regulation
Using the supply and demand functions from problem 1, suppose a price ceiling of p- = 2 were implemented.
a) How much is supplied to the market and how much is demanded?
b) What is the excess demand?
c) Calculate the consumer surplus, producer surplus, and welfare level without the price ceiling.
d) Calculate the consumer surplus, producer surplus, welfare level, and dead weight loss with this price ceiling.
e) What if the price ceiling were p- = 4? How would our results change?
3. Taxes
Using the supply and demand functions from problem 1, suppose a per unit tax of 1 were charged to the buyer.
a) How much does the buyer pay?
b) How much does the seller receive?
c) What is the equilibrium quantity?
d) How much tax revenue is generated?
e) How much tax burden do the buyer and seller each bear?
f) Calculate the consumer surplus, producer surplus, welfare level, and dead weight loss with this tax.
g) Suppose the per unit tax were charged to the seller. How would our results change?
4. Short Answer Question
You are the manager of a high end hotel in downtown Seattle, and the owner of the hotel is concerned with revenue generation from room service and concierge services. The owner believes that the prices for both types of service should be raised in order to increase their revenue. You calculate the following values:
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Room Service
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Concierge Service
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Price Elasticity of Demand
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-1.5
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-0.4
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Income Elasticity
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0.4
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0.6
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Cross-Price Elasticity
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0.05
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0.1
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The owner wants your opinion on what she should do. What do you recommend?