HW #1

ECON 231 Professor Rennhoff

Intermediate Microeconomics Fall 2011

Due at the beginning of class on Tuesday, September 6. You may work in groups of 3 or
less. If you work on the assignment in groups, please only turn in one copy of the
assignment with all group members names on it.

1. VandyTech has developed a new product, which allows students to study while they are
sleeping. After conducting lengthy market research, VandyTech has found that the market
demand for this product is given as follows:
Q 200 5 P

a. At what price is the price elasticity of demand equal to zero?

b. At what price is the price elasticity of demand equal to -1?
c. If the price is $30, what is the price elasticity of demand?

2. The demand curve for good X is given by:

PX 25 0.005Q X 0.15 PY

where PX represents the price (in dollars per unit) of good X and P Y represents the selling
price of product Y. The supply curve of product X is given by:

PX 5 0.004Q X

Let the price of Y equal $10. Determine the equilibrium price and quantity of X. Are X
and Y complements or substitutes? How do you know?

3. Bobs Weiner World sells hot dogs on the mall in Washington DC. Bob is no ordinary
street vendorhe sells tofu dogs to grab some of the health food market. Bob was also an
economics major, so he knows a little something or two about economics. Bob has estimated that
the demand for his tofu dogs is:

P 4 0.02Q

And Bob knows that his supply curve is:

P 0.25 0.005Q

a. Bobs assistant, Alex, suggests that they charge $1.50 per hot dog. If Bobs main
objective is market equilibrium, should he take Alexs advice? If this is not the
market equilibrium, what is the appropriate surplus or shortage?
b. Bobs brother, Sam, runs a hot dog stand in LA. His demand is given by:
P 5.50 0.01Q
On an average week, whose demand curve is more elastic if the price of hot dogs is
$2 in both LA and DC?
OVER =>
4. The government is considering a tax on soda (i.e. Coke, Pepsi, etc.) in order to cut down
on consumption and raise tax revenues. The government is planning on collecting a $1
tax per can of soda from buyers. The demand and supply curves for soda are:
QD 10 P
QS P
a. What is the equilibrium price and quantity before the tax? Illustrate with a graph.
b. Now suppose the government implements the tax. What is the new quantity,
price buyers pay and the price sellers receive? Illustrate with a graph. (Note: the
tax is being collected from the buyer). Calculate the tax revenues and the tax
shares for the buyer and seller.
c. Now suppose the government collects the tax from the sellers. What is the new
quantity, price buyers pay and the price sellers receive? Illustrate with a graph.
(Note: the tax is being collected from the seller). Calculate the tax revenues and
the tax shares for the buyer and seller.