Problem Set 3
Due on Thursday, October 21, in class
- On one graph, draw a demand curve that has a y-intercept at $30 and a slope of -0.25; and a supply curve that has an x-intercept of 10 units (of quantity) and a slope of 0.5. Then plot the following pairs of points and calculate the demand and supply elasticities, respectively, in each range (e.g., from A to B):
- On the demand curve – A (40, $20) and B (20, $25)
- On the demand curve – C (100, $5) and D (80, $10)
- On the supply curve – E (10, $0) and F (30, $10)
- On the supply curve – G (60, $25) and H (80, $35)
- University of Richmond Professor Richard Craft analyzes the state’s pricing of ‘vanity plates’ (license plates that you can personalize: MIDD15, UDAMAN, BOSOX12, that kind of thing!) He finds that in California, where vanity plates cost $28.75, the elasticity of demand is 0.52. In Massachusetts, where vanity plates cost $50, the elasticity of demand is 3.52.
- Assuming vanity plates have zero production coast and his estimates are correct, is each state collecting the maximum revenue it can from vanity plates? Explain your reasoning.
- What recommendation would you have for each state to maximize revenue?
- Assuming the demand curves are linear, graphically demonstrate your reasoning in a and b.
- Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why elasticities differ
- Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off-peak hours.
- Elasticity of demand is 0.7 for buses in the short run and 1.5 in the long run.
- Elasticity of demand for toll roads is 4.7 for low-income commuters and 0.63 for high-income commuters.
- The following are elasticities associated with beer, wine and spirits (hard liquor such as vodka, gin, etc.) in the USA, calculated by American Express economist X.M. Gao:
Price elasticity of demand for beer: 0.23
Cross-price elasticity of demand between beer and wine: 0.31
Cross-price elasticity of demand between beer and spirits: 0.15
Income elasticity of demand for beer: -0.09
Income elasticity of demand for wine: 5.03
Income elasticity of demand for spirits: 1.21
- Explain the intuition behind each of these elasticities. What do these numbers say about the drinking habits of Americans?
- Imagine that you worked for a presidential administration that wanted to reduce drinking among Americans. Given these data, what policies would you recommend and why? Justify your answer.
- As mentioned by Greg Mankiw in the first video we saw in class, there has been a sharp decline – in the USA and Europe – in family farms over the last five decades, in part as a result of the growth of advanced farming technology. These family farms have generally been replaced by more efficient large corporate farms. Using demand and supply analysis, show how this has happened. What is likely to be the elasticity of demand for the products of farms, and why is that elasticity driving these results?