Davidson College                                                                                                                            Mark C. Foley

Department of Economics                                                                                                              Fall 2002

Principles of Economics

 

Problem Set #2

Due Friday, September  13th, in class[*]

 

Short Answers  

 

1. Find a recent newspaper or magazine article which describes a market.  Graph and interpret what is happening in that market using a model of supply and demand.  (Please attach a photocopy or printout of your article.)

 

2. Ch. 5, Question for Review #10

 

Problems

 

1. Suppose the supply and demand schedules for bicycles are as follows:

 

Price

Quantity Demanded

(per year)

Quantity Supplied

(per year)

80

20

12

100

18

14

120

16

16

140

14

18

160

12

20

180

10

22

 

 

(a) Graph these curves and show the equilibrium price and quantity.

 

(b) Now suppose that it becomes unfashionable to ride a bike, so quantity demanded at each price falls by 4 million bikes per year. What is the new equilibrium price and quantity? Show this solution graphically. Explain why the quantity falls by less than 4 million bikes per year.

 

(c) Suppose that instead that several major bicycle producers go out of business, thereby reducing the quantity supplied by 4 million bikes at every price. Find the new equilibrium price and quantity. Explain again why the quantity falls by less than 4 million bikes per year.

 

(d) What are the equilibrium price and quantity if the shifts described in part (b) and (c) happen simultaneously?

 

2. Explain why the price elasticity of demand varies along a linear demand curve, Q = a – bP, from elastic at higher prices to inelastic at lower prices.   (A numerical example may help you.) 

 

3. The market for Davidson College sweatshirts is described by

QD = 720 – 12P and QS = 80 + 8P, where Q = sweatshirts per week and P = dollars per sweatshirt.

 

(a) Calculate the equilibrium price and quantity.

 

(b) The Davidson Town Council is persuaded that the supplier of sweatshirts is not earning enough profit.  The town agrees to buy or sell sweatshirts as necessary to maintain a market price of $40.  What is the number of sweatshirts bought by consumers at this price?  What does the program cost the town of Davidson?

 

(c) Is demand elastic, inelastic, or unit-elastic over this range?  Check both point and arc elasticity.

 

 

Textbook Problems & Applications

 

1. Ch. 4, Problem #11

 

2. Ch. 5, Problem #3

 

3. Ch. 5, Problem #5

 

 

 

 

 

 


* Don't forget to write a note indicating whom you worked with, if anyone, giving credit where credit is due.