Chapter 3 – Exercises and suggested
solutions
1. A person’s demand for gizmos is given by the following equation:
q = 6 - 0.5p + 0.0002I,
where q is the quantity demanded at price p when the person’s income is I.
Assume initially that the person’s income is $40,000.
a) At what price will demand fall to zero? (This is sometimes called the choke price because it is the
price that chokes off demand.)
b) If the market price for gizmos is $10, how many will be demanded?
c) At a price of $10, what is the price elasticity of demand for gizmos?
d) At a price of $10, what is the consumer surplus?
e) If price rises to $12, how much consumer surplus is lost?
f) If income were $60,000, what would be the consumer surplus loss from a price rise from $10 to $12?
, Chapter 3 – Exercises and suggested
solutions
2. At the current market equilibrium, the price of a good equals $40 and the quantity equals 10 units. At
this equilibrium, the price elasticity of supply is 2.0. Assume that the supply schedule is linear.
a) Use the price elasticity and market equilibrium to find the supply schedule. (Hint: the supply
schedule has the following form: q = a + (Δq/Δp)p. First, find the value of Δq/Δp, and then, find the
value of a.)
b) Calculate the producer surplus in the market
c) Imagine that a policy results in price falling from $40 to $30. By how much does producer surplus fall?
d) What fraction of the lost producer surplus is due to the reduction in the quantity supplied and what
fraction is due to the fall in price received per unit sold?
solutions
1. A person’s demand for gizmos is given by the following equation:
q = 6 - 0.5p + 0.0002I,
where q is the quantity demanded at price p when the person’s income is I.
Assume initially that the person’s income is $40,000.
a) At what price will demand fall to zero? (This is sometimes called the choke price because it is the
price that chokes off demand.)
b) If the market price for gizmos is $10, how many will be demanded?
c) At a price of $10, what is the price elasticity of demand for gizmos?
d) At a price of $10, what is the consumer surplus?
e) If price rises to $12, how much consumer surplus is lost?
f) If income were $60,000, what would be the consumer surplus loss from a price rise from $10 to $12?
, Chapter 3 – Exercises and suggested
solutions
2. At the current market equilibrium, the price of a good equals $40 and the quantity equals 10 units. At
this equilibrium, the price elasticity of supply is 2.0. Assume that the supply schedule is linear.
a) Use the price elasticity and market equilibrium to find the supply schedule. (Hint: the supply
schedule has the following form: q = a + (Δq/Δp)p. First, find the value of Δq/Δp, and then, find the
value of a.)
b) Calculate the producer surplus in the market
c) Imagine that a policy results in price falling from $40 to $30. By how much does producer surplus fall?
d) What fraction of the lost producer surplus is due to the reduction in the quantity supplied and what
fraction is due to the fall in price received per unit sold?
