Microeconomics Problem Set

This document presents a solved microeconomics problem set. It covers various concepts including income elasticity of demand, price elasticity of demand, cross-price elasticity of demand, and market equilibrium. The solutions demonstrate calculations for these elasticities using provided data, classifying goods as normal or inferior based on their income elasticity. The problem set also includes graphical representations of supply and demand curves to illustrate market equilibrium. The solutions are detailed and clearly explain the economic principles involved.

MICROECONOMICS

QUESTION 2
(a)
Income elasticity of demand (IEoD) = (% change in quantity demanded) / (% change in
income)
= $1800 - $1500 / $1500* 100
= 20%
IEoD = 20%
As given, demand for tickets of concert increased by 25% and for bus rides, it decreased
by 6%
Income elasticity of demand for concert tickets = 25% / 20%
=1.25%
If IEoD > 1, then they are price elastic goods in case of concert tickets. These are price
elastic because IEoD > 1 which represents that there is high variation in demand and price. As
there is positive and increasing income, it means that demand is high. So, these are normal goods.
Income elasticity of demand for bus rides = -6% / 20%
=-0.3%
If IEoD < 0 then they are price inelastic goods. However, in case of bus rides, they are
income inelastic that means demand is not sensitive to changing price. These are inferior goods
because demand is decreasing but income is increasing.
(b)
PeoD for Sushi = (% change in quantity demanded) / (% Change in Price)
Price elasticity of Sushi=
= 3% / (-7%)
= (-0.42%)
Cross elasticity of Wasabi= (% change in quantity demanded of Wasabi) / (% Change in
Price of Sushi)
=5% / (-7%)

= (-0.71%)
(c)
PeoD for domestic banana = (% change in quantity demanded) / (% Change in Price)
(-0.50) = 5% / change in price
Change in price = 5/ (-0.50)
= (-10)
Cross elasticity of imported banana = % change in quantity demanded of imported banana
/ % change in price of domestic banana
= 3% / (-10%)
= (-0.3%)
(d)
Graph of price against quantity
Price (Dollars per bag) Quantity Demanded Quantity supplied
12 3500 1500
14 3000 2000
16 2500 2500
18 2000 3000
20 1500 3500

(e)
Graph of price against quantity
Price (dollars per bag) Quantity demanded Quantity supplied
100 2000 0
150 1400 600
200 1200 800
250 1000 1000
300 800 1200
350 600 1400
400 0 2000