ECON 102 Homework 2

ECON 102 Homework 2

1. Use the graph below to answer the following questions. (26 points)a. What is the absolute value of the price elasticity of demand between P=100 and P=80? (5points)i.Based on the value you calculated, is demand elastic, inelastic, or unit elastic? (4points)ii. What does the value you calculated imply about the relationship between priceand quantity demanded? (4 points)b. What is the absolute value of the price elasticity of demand between P=40 and P=20? (5points)i.Based on the value you calculated, is demand elastic, inelastic, or unit elastic? (4points)ii.What does the value you calculated imply about the relationship between priceand quantity demanded? (4 points)2. Use the graph below to answer the following questions. (36 points each part is worth 4points)a. Elasticity values are greater than 1 in absolute value in the portion of the graph describedby letter .b. Elasticity values are less than 1 in absolute value in the portion of the graph described byletter .c. Elasticity values are exactly equal to 1 in absolute value in the portion of the graphdescribed by letter .d. The inelastic portion of the graph is the area described by letter .e. The elastic portion of the graph is the area described by letter .f. The unit elastic portion of the graph is the area described by letter .g. Total revenue is maximized over the portion of the graph described by letter .h. Total revenue is increasing when price increases over the portion of the graph describedby letter .i. Total revenue is decreasing when price increases over the portion of the graph describedby letter .3. Suppose the demand for guitars in State College is given by Qd = 8,000 10P where Qd isthe quantity demanded, and P is the price of guitars. Also, suppose the supply of guitars is givenby Qs = 30P 2000, where Qs is the quantity supplied of guitars. (38 points)a) Calculate the equilibrium price of guitars and the equilibrium quantity of guitars in StateCollege. Show your work. (10 points)b) Suppose the actual price of guitars is \$500. Determine if there is a shortage, a surplus, or ifthe market is in equilibrium at a price of \$500. If there is a shortage or surplus, calculate howmuch the shortage or surplus is. (8 points)c) Given your answer to b), is the price of guitars likely to rise, fall, or stay the same? (4 points)d) Suppose guitars and guitar strings are complements. Draw a graph indicating what willhappen in the market for guitar strings if the price of guitars decreases. Be sure to label yourgraph carefully, putting Price on the vertical axis and Quantity on the horizontal axis. You donot need to have actual numbers on this graph, but you should clearly indicate how the decreasein the price of guitars will affect the market for guitar strings, and what will happen to theequilibrium price and quantity of guitar strings. (16 points)