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of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

12. Because bagels and cream cheese are often eaten together, they are complements.

a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.

b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern— a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.

13. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

Price Quantity Demanded Quantity Supplied

$ 4 10,000 tickets 8,000 tickets 8 8,000 8,000 12 6,000 8,000 16 4,000 8,000 20 2,000 8,000

a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?

b. What are the equilibrium price and quantity of tickets?

c. Your college plans to increase total enrollment next year by 5,000 students. The

additional students will have the following demand schedule:

Price Quantity Demanded

$ 4 4,000 tickets 8 3,000 12 2,000 16 1,000

20 0

Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?

14. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1,600 – 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = 1,400 + 700P, where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for chocolate bars.

1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

a. required textbooks or mystery novels b. Beethoven recordings or classical music recordings in general

c. subway rides during the next six months or subway rides during the next five years d. root beer or water

2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

Quantity Demanded Quantity Demanded Price (business travelers) (vacationers)

$150 2,100 tickets 1,000 tickets 200 2,000 800 250 1,900 600 300 1,800 400

a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)

b. Why might vacationers have a different elasticity from business travelers?

3. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

a. if the price of heating oil rises from $1.80

to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)

b. Why might this elasticity depend on the time horizon?

4. A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.

Billy: Demand increased, but supply was totally inelastic.

Marian: Supply increased, but so did demand.

Valerie: Supply decreased, but demand was totally inelastic.

6. Suppose that your demand schedule for DVDs is as follows:

Quantity Demanded Quantity Demanded Price (income = $10,000) (income = $12,000)

$ 8 40 DVDs 50 DVDs 10 32 45 12 24 30 14 16 20 16 8 12

a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000.

b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,000 if (i) the price is $12 and (ii) the price is $16.

7. You have the following information about good X and good Y:

? Income elasticity of demand for good X: –3 ? Cross-price elasticity of demand for good X

with respect to the price of good Y: 2 Would an increase in income and a decrease in the price of good Y unambiguously decrease the demand for good X? Why or why not? 8. Maria has decided always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?

c. If Maria‘s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?

9. The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: ―There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.‖ a. Use these data to estimate the price elasticity of demand for subway rides.

b. According to your estimate, what happens to the Transit Authority‘s revenue when the fare rises?

c. Why might your estimate of the elasticity be unreliable?

10. Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, ―I‘d like 10 gallons of gas.‖ Jerry says, ―I‘d like $10 worth of gas.‖ What is each driver‘s price elasticity of demand? 11. Consider public policy aimed at smoking. a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government

wants to reduce smoking by

20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now