Introductory Economics
Eco 108
HW 3

1. Suppose the price of butter rises from $2.00/LB to $2.50/LB, and your consumption of butter falls from 1 LB to .6 LB. Calculate the price elasticity of demand for butter, Characterize the demand for butter, is it elastic?

2. Sue has an income of $600/month, and her consumption of ramen noodles is 20 packages/month. After she gets a raise to $800/month, she eats 15 pakages each month. Calculate Sue's income elasticity of demand for ramen noodles. What kind of a good is ramen noodles?

3. When the Surf Shop raises the price of shorts from $20 to $25, its sales of sunglasses falls from 300 pairs a week to 250 pairs a week. Calculate the cross price elasticity. What kind of goods are shorts and sunglasses?

4. When Diet Jolt lowers their price from $3.00 a six pack to $2.00 a six pack, John's consumption of Diet Zip falls from 12 six packs a week to 4 six packs a week. Calculate John's cross price elasticity. What kind of goods are Diet Jolt and Diet Zip?

5. Consider the market for winter coats. It might be helpful to do the graph in this problem using several colors.

   • [a.] Draw a well labeled Supply-Demand diagram for this market. Label the equilibrium price and quantity.

   • [b.] Define consumer and producer surplus. Label the consumer surplus and the producer surplus on your graph (do this by outlining each one).

   • [c.] Suppose the government taxes suppliers, $t, for each coat that they sell. What curve does this affect? How? Draw this effect on your graph. Label the new equilibrium price and quantity.

   • [d.] On your graph, label the new consumer surplus, the new producer surplus, the government revenue, and the dead weight loss.

   • [e.] Given your diagram, who bears the burden of the tax?

6. This problem is not required to recieve an S for this homework assignment.
   Suppose we have demand given by Q = 40-P and supply given by Q = 3P. It may help to graph this problem as you do the algebra, but this is not required.

   • [a.] What is the equilibrium price. What is the equilibrium quantity? What is the consumer surplus? What is the producer surplus?
   • [b.] Suppose the government taxes the supplier 1$ per unit sold. Notice that supply is given by P = Q/3, the tax shifts supply to P = Q/3+1, or Q = 3P-3. What is the new equilibrium price? What is the new equilibrium quantity?
   • [c.] What are the new consumer and producer surpluses? How much revenue does the government raise? What is the dead weight loss associated with this tax policy?
   • [d.] Who bears the burden of this tax? How can you tell?

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