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ECON 303 Homework 01 Microeconomics: Real Price of Butter

This document contains an economics homework assignment with three questions. Question 1 asks about the real price of butter from 1980 to 2000 using a Consumer Price Index table. The real price has decreased since 1980. Question 2 provides supply and demand equations and asks to calculate market clearing prices and quantities for two average income levels. Question 3 calculates price elasticities of demand and supply at two price points using a demand and supply table, and identifies the equilibrium price and quantity, as well as the shortage that would result from a price ceiling.

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123 views

ECON 303 Homework 01 Microeconomics: Real Price of Butter

This document contains an economics homework assignment with three questions. Question 1 asks about the real price of butter from 1980 to 2000 using a Consumer Price Index table. The real price has decreased since 1980. Question 2 provides supply and demand equations and asks to calculate market clearing prices and quantities for two average income levels. Question 3 calculates price elasticities of demand and supply at two price points using a demand and supply table, and identifies the equilibrium price and quantity, as well as the shortage that would result from a price ceiling.

Uploaded by

alexsheep17
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ECON 303

HOMEWORK 01

MICROECONOMICS

1. The following table shows the average retail price of salted grade AA butter per pound and the Consumer Price Index from 1980 to 2000, scaled so that the CPI = 100 in 1980. 1980 1985 1990 1995 2000 Consumer Price Index 100.00 130.58 158.56 184.95 208.98 Retail Price of Butter $1.88 $2.12 $1.99 $1.61 $2.52 a. Calculate the real price of butter in 1980 dollars. ( ( 1980 100/100*(1.88) =1.88 1985 100/130.58*(2.12) =1.62 1990 100/158.56*(1.99) =1.26 ) 1995 0.87 2000 100/208.98*(2..52) =1.21 )

Real Price of Butter

b. Has the real price increased/decreased/stayed the same since 1980? The real price has decreased since 1980 till 1995, it increased a little in 2000 but it is still less than 1980. So the real price has decreased since 1980. c. What is the percentage change in the real price (1980 dollars) from 1980 to 2000? (1.21-1.88)/1.88 = -35.64% 2. Suppose the demand curve for a product is given by average income measured in thousands of dollars. The supply curve is a. If , find the market clearing price and quantity for the product. , where I is .

QS=QD 300-2P+4I=3P-50 300-2P+4(25)=3P-50 450=5P ______

P=90, Q=220 __________________________________________________________________ b. If , find the market clearing price and quantity for the product.

QS=QD 300-2P+4I=3P-50 300-2P+4(50)=3P-50 ____________________________________________________________ =550=5P P=110, Q=280

ECON 303

HOMEWORK 01

MICROECONOMICS

3. Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows: Price (Dollars) 60 80 100 120 Demand (Millions) 22 20 18 16 Supply (Millions) 14 16 18 20

a. Calculate the price elasticity of demand when the price is $80 and when the price is $100.

In this example, with each price increase of $20, the quantity demanded decreases by 2 million.

At P = 80, quantity demanded is 20 million, therefore elasticity of demand is (80/20)*-0.10 = -0.4 At P = 100, quantity demanded equals 18 million, therefore elasticity of demand is (100/18)*-0.10 = -0.56 b. Calculate the price elasticity of supply when the price is $80 and when the price is $100. At P = 80, quantity supplied is 16 million, therefore elasticity of supply is (80/16)*(2/20) = 0.5 At P = 100, quantity supplied equals 18 million, therefore elasticity of supply is (100/18)*(2/20) = 0.56 c. What are the equilibrium price and quantity? The equilibrium price is 100 and the equilibrium quantity is 18, because the quantity demanded and quantity supplied are equal at the price of 100. d. Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so, how large will it be? There will be a shortage because the quantity demanded is larger than the quantity supplied, the shortage of the quantity will be 4 million and the shortage of loss will be 320 million dollars.

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