Slide 1EquilibriumEquilibirumSlide 4Slide 5Price Controls & ElasticityElasticity and TimeElasticity and TimeElasticityElasticityElasticityElasticityEquilibriumEquilibriumExam 1 Review ProblemsCH 2EquilibriumThe demand for salmon cakes is Qd= 100-3P and the supply for salmon cakes is Qs=2P.1. The equilibrium quantity is __________.2. At the equilibrium the price elasticity of demand is______.EquilibirumThe demand for salmon cakes is Qd= 100-3P and the supply for salmon cakes is Qs=2P.If the price is $10, there will be a ______ (shortage/surplus) of _________.Suppose the demand function for pizza in Tucson is Q=1000-100p+500pT+0.05I, where Q is the quantity of pizza slices demanded in thousands per year, p is the price of a slice of pizza, pT is the price of Tacos, and I is the average annual income of consumers. Assume that p = $2 cents, pT=$1, and I=$40,000.What is the income elasticity of demand?0.05 x 40000/3300 = 0.61Income Elasticity of DemandAdapted from a problem in Perloff, 6th EditionSuppose that the price elasticity of demand for lima beans is -0.5. A 10% decrease in price will bring about a _____percent change in quantity demanded.A. 5B. -5C. 0.5D. -0.5(-0.5)(-10) = 5Price Controls & ElasticitySuppose that at the market clearing price the price elasticity of demand for lima beans is -.5 and the price elasticity of supply is 1. What will result if the government caps the price 10% below the equilibrium price?A. A shortage of 15% of the equilibrium quantity.B. A shortage of 5% of the equilibrium quantity.C. A shortage of 1.5% of the equilibrium quantityD. A shortage of 0.5% of the equilibrium quantityElasticity and TimeThe price charged by a toll bridge increases. We would expect the price elasticity of the demand to be more elastic in the _______.A. Short-runB. Long-runNot a durable good it is a service. More time equals more elasticElasticity and TimeThe economy goes into recession. The refrigerator market will be affected the most in the _______ because the income elasticity of demand is more elastic in the _______.A. Long-run, long-runB. Short-run, long-runC. Long-run, short-runD. Short-run, short-runElasticityAfter a 5% increase in the price of pizza the quantity supplied increases by 2%. The price elasticity of supply for pizza is 0.4.2/5 = 0.4 If the price elasticity of supply for pizza was .6 instead, an increase in demand would lead to a _________ (smaller/larger) change in quantity supplied. A. SmallerB. Larger3/5 = 0.6Elasticity•Bob’s Burgers wants to increase total revenue. If demand is elastic what should it do?A. Increase priceB. Decrease priceC. It is not possible for Bob to increase revenue when demand is elastic.D. More information is needed.ElasticityWhich of the following goods is most likely to have a positive cross-price elasticity of demand?A. Wheat and honeyB. IPhone and androidC. Spaghetti sauce and pastaD. Horses and saddlesElasticityWhich of the following is most likely to have a negative income elasticity of demand?A. Bus ticketsB. Vacation packages to HawaiiC. New automobilesD. New snow skisEquilibriumIn the market for soda, the current price is 50 cents per can and 100,000,000 cans are sold. Which of the following events would lead to a new equilibrium price of 40 cents and quantity of 50,000,000 cans?A. an increase in the price of the ingredients used to make soda.B. A decrease in the price hamburgers which consumers eat with soda. C. A decrease in the price of other kinds of beverage that consumers drink instead of soda.D. an improvement in soda manufacturing technology.EquilibriumThe cost of diesel engines, a major component in tractors, has decreased. This will cause:A. the supply of tractors to increase.B. the supply of tractors to decrease.C. the demand for tractors to increase.D. None of the