The slides for this (as well as the previous two) tutorial(s) are

available on Thursday on my (very primitive) web page:

http://www.sfu.ca/~haiyunc/

Chapter 4. Q24
Prior to unleaded gasoline, all cars used leaded gas, with the more
expensive gas containing more lead. In an eort to mitigate
pollution, a tax of $.10/gallon was placed on all gas in the hope to
reduce gas consumption and thus lower pollution. Can we say,
unambiguously, that such a tax would lower pollution from leaded
gas? Why or Why not?
There are two opposing eects
Tax increases price

quantity demanded drops (law of

demand)
Same amount of tax applies to both qualities of leaded gas

relative price of the more expensive (and more polluting) gas is

lower

substitution towards to more polluting gas

Net outcome depends on the relative magnitude of the two

eects, and so is ambiguous

a priori.

Chapter 4. Q28

Does the fact that garbage men make more money than the
average high school teacher mean that society values garbage
removal more than education? If not, what does it mean?
No. Salary is not a good estimate of

total value

It just means that the garbage man is more valuable than the
average high school teacher

at the margin

Chapter 4. Q38

Since the introduction of low fat foods, obesity rates have

increased greatly. Given that low fat foods are healthier per unit of
calorie compared to the high fat ones, how do you explain, using
law of demand, the rise in obesity as a rational response to the
consumption of low fat foods?
If low fat food is healthier per unit of calorie, then the (health)
cost of consuming low fat food is lower (than the high fat
ones)
By law of demand, a fall in the price/cost per calorie results in
an increase in quantity of calories consumed
Therefore, more calories consumed leads to obesity

Chapter 5. Q2
True or False: The quantity demanded can change, even though
the demand has not changed, but if the demand changes, then the
quantity demanded must also change.

Fix a demand curve,

changing price would
lead to changes in
quantity demanded
Change a demand
(curve), then quantity
demanded would also
change for any given
price level

Chapter 5. Q2
change in quantity demanded =  movement along the
demand curve
e.g. changes from

Q0

to

Q1

, or from

Q0

to

Q1

, or vice versa

change in demand =  shift/rotation of demand (curve)

e.g. changes from

to

, or vice versa

Chapter 5. Q10

True/False/Uncertain: The demand to view the

Mona Lisa

painting is completely inelastic because there is only one, and the

artist is long dead.
Uncertain.
From the fact that there is only one

Mona Lisa painting, we

cannot infer anything about elasticity

Remember that elasticity depends on the nature of the
substitutes, which in this case is not clear

Chapter 5. Q22
From the fact that the movie industry earned higher revenues in
recessions, what can we say about the overall income elasticity for
the demand for movies?
Movies must be an

inferior good

Goods with inverse relationship between income and quantity

demanded

Thus, the income elasticity for movies must be negative

Given the answer to the previous question, why, do you think,
better movies are made during recessions?
This can be caused by the demanders: when times are good,
people can aord more expensive means of entertainment,
thus a low demand for movies with good intellectual contents.
The situation reverses when times are not so good.

Chapter 5. Q24a
Suppose demand curve for good

is given by

Qx = 60 2Px + 0.5Py 0.1M

a. If

Py = 10 and M = 100, graph the demand curve.

Note that the demand curve becomes

Qx =

60

60

55

2Px + 0.5 10 0.1 100

2Px + 5 10
2Px

Two useful values in plotting the (linear) demand curve:

Px = 0
Qx = 0

Qx = 55
Px = 27.5

vertical intercept

horizontal intercept

Chapter 5. Q24a  Plotting Demand Curve

It is customary in economics to plot the

Qx = 55 2Px
1. draw the axes,

P on vertical axis,
Q on horizontal axis

2. identify the vertical

and horizontal
intercepts
3. use a straight line to
connect the two
intercepts

inverse demand

Px = 27.5 0.5Qx

Chapter 5. Q24a

Px = 20 and Px = 10.
Px = 20, quantity demanded is
Qx = 55 2 20 = 15
For Px = 10, quantity demanded is
Qx = 55 2 10 = 35

a. (cont'd) Show quantities demanded for

For

Calculate own price arc elasticity over the price range.

1
0
1
Qx
2 (P + Px )
1 x
0
1
Px
2 (Qx + Qx )
0.5(20 + 10)
= 2
0.5(15 + 35)

Exx =

= 2

15
25

= 30/25
= 6/5
= 1.2

Chapter 5. Q24b
b. Assume that

Px = 10 and M = 100.

Suppose

to 20. Calculate the cross price elasticity for

For

Py = 10, quantity demanded is

x.

Py

goes from 10

Qx = 60 20 + 0.5 10 10 = 35
For

Py = 20, quantity demanded is

Qx = 60 20 + 0.5 20 10 = 40

Cross price elasticity for

Exy =
Are

and

is

1
0
1
Qx
2 (Py + Py )
1 0
= 0.5
1
Py
2 (Qx + Qx )

15
37.5

complements or substitutes?

Substitutes, since cross price elasticity is positive.

= 0.2

Chapter 5. Q24c
Px = Py = 10, and income changes from 100 to 200.
Calculate the income elasticity of demand for good x .
For M = 100, quantity demanded is

c. Assume

Qx = 60 20 + 5 0.1 100 = 35
For

M = 200, quantity demanded is

Qx = 60 20 + 5 0.1 200 = 25

Income elasticity is

ExM =
Is

1
(M 0 + M 1 )
Qx
2 0
= 0.1
1
1
M
2 (Qx + Qx )

a normal or inferior good?

Inferior, because income elasticity is negative

150
30

= 0.5

Chapter 5. Q28
Let demand for good

be

Qx = 100 2Px + Py 0.5M

Px = 2, Py = 5, and M = 100.
Suppose Px jumps to 4. Calculate elasticity of demand.
Qx (Px = 2) = 51 and Qx (Px = 4) = 47, thus

Suppose
a.

Exx = 2
b. Are

and

49

0.122

complements or substitutes?

Substitutes, because
c. Is

Py Qx

normal or inferior?

Inferior, because

M Qx

A trick for b and c: check the signs of the corresponding terms

Chapter 5. Q30
In 2010, the price of Sockeye salmon fell from $5 per pound to $1
per pound, due to an unexpected increase in its supply from 1
million to 30 million, compared to 2009.
a. Assuming that 30% of the salmon were caught (and sold) each
year, calculate the arc price elasticity.

P = 5 and Q = 0.3 million

In 2010, P = 1 and Q = 9 million

In 2009,

Q = 0.39 = 8.7
Pavg price 1
5
4
3

avg quantity

4.65

Exx =

8.7
4

3
4.65

1.4

b. Do you think local shermen were happier in 2010?

Yes,

Exx < 1 means total revenue is on the rise, and the

increase in quantity demanded is more than the drop in price

in percentage terms