I need these 2 questions done in detail showing the work.
Homework
1
Due on Sunday, 9/29 by 11:55pm
Hints:
For problem 1, please refer to chapter 4 (elasticity). Bear in mind that price elasticity of demand is calculated using the percentage changes. For problem 2, please refer to chapter 5 (efficiency and equity).
1. In 2003, when music downloading first took off, Universal Music slashed the prices of CDs from an average of $21 to an average of $15. The company said that it expected the price cut to boost the quantity of CDs sold by 30%.
a. What was Universal Music’s estimate of the price elasticity of demand for CDs?
b. Given your answer to part (a), if you were making the pricing decision at Universal Music, would you cut the price, raise the price, or leave the price unchanged? Explain your decision.
2. The table gives the demand and supply schedules for sandwiches.
Price
(dollars per sandwich)
Quantity demanded
(sandwiches per hour)
Quantity supplied
(sandwiches per hour)
0
300
0
1
250
50
2
200
100
3
150
150
4
100
200
5
50
250
6
0
300
a. What is the maximum price that consumers are willing to pay for the 200th sandwich?
b. What is the minimum price that producers are willing to accept for the 200th sandwich?
c. Are 200 sandwiches a day less than or greater than the efficient quantity?
d. If the sandwich market is efficient, what is the consumer surplus?
e. If the sandwich market is efficient, what is the producer surplus?
f. If sandwich makers produce 200 a day, what is the deadweight loss?
g. If the demand for sandwiches increases and the sandwich markers continue to produce 200 a day, describe the change in consumer surplus, producer surplus, total surplus, and the deadweight loss.
1
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