NAME ________________________ 

R. Horn

Economics 331: Warm up Problems: Supply, Demand, Elasticity

1. What do you think will happen to the price and quantity of DVD players if:

    1. the availability of good movies to play on DVD players increases?
    2. personal income increases?
    3. the price of inputs used to produce DVD players increases?
    4. the price at local movie theatres declines substantially?
2. If the demand for a product is inelastic, what will happen to total revenue if price is increased?

3. What sign are the cross elasticities for substitute products? Distinguish between normal and inferior goods.

4. GD Marketing faces a linear demand curve. Currently, it is selling at a price and quantity where its elasticity of demand is –1.5. Consultants have suggested that the company expand its output because it is facing an elastic demand curve. Do you agree with this recommendation?

5. GD Marketing faces the demand curve: P = 70 – 0.001Q. What price and quantity maximize total revenue? What is the elasticity at this point?

6. Prior to a price increase, the price and quantity demanded of a product were $10 and 100. After the price increase they were $12 and 90.

    1. calculate the price elasticity of demand. is demand elastic or inelastic?
    2. what happened to total revenue?

7. In Durham, New Hampshire, when the price of electricity was increased by 8 percent, the demand for natural gas increased by 3.2 percent in the manufacturing sector and by 6.4 percent in the residential sector. The demand for power tools, however, decreased by 1 percent.

    a. What is the cross price elasticity of demand for natural gas in the manufacturing sector?

    b. What is the cross price elasticity in the residential sector?

    c. What is the cross price elasticity of demand for power tools?

    d. Are electricity and natural gas substitutes or complements? What about electricity and power tools?