Micro Assignment Essay

Submitted By JoHigh1
Words: 1584
Pages: 7

Question 1
A) POINT ONE
P1=$2.26
Q1=620.82

The price elasticity of demand using the midpoint method can be calculated with the following equation:
= (Q2-Q1)/ ((Q2+Q1)/2) (P2-P1)/ ((P2+P1)/2)

Using the values given, the equation is as follows:

= (580270-620820)/ ((580270+620820)/2)
($3.39-$2.26)/ (($3.39+$2.26)/2)

= 0.06752200084923
40

This shows that the price elasticity of demand for Metlink train tickets is:

= 0.16880500212308

B) From the figures provided, we can see that as the price of the train ticket rises, the quantity demanded falls. This follows the law of demand meaning that train tickets are a normal good, as opposed to a giffen good that goes against the law of demand. Due to the elastic figure being less than 1 we can draw the conclusion that train tickets are inelastic. This means there is a relatively small change in the quantity demand despite a change n price. This also suggests that Metlink train tickets are a necessity opposed to a luxury.

Question 2
Although previous national studies showed video rentals as being inelastic new evidence from a video store contradicts these results. The manager at the store increased their price expecting a rise in their profit, but in fact the increased price had the opposite effect. This is because although the video rental demand had previously been shown to be inelastic time had past. In the time that had past the ability of the renters to substitute renting video had changed. With new technology it is now easy to download movies thus creating less demand for renting them. Due to new revolutions the demand curve would now become elastic so the demand curve has flattened out. This means because the price has been raised by 20% the demand for video rentals will reduce proving it harder to rent out videos. Revenue will decrease due to lower sales and although being at a higher price it does not match previous years income. This is represented in the following graph:

Question 3
A) i) In the short term, if scientists discovered that eating soybeans prevents cancer and heart disease this would shift the demand curve to the right. As a result the quantity demand rises due to consumers hearing that soybeans are good for your health. This increases the equilibrium price and quantity, because there is no shift in the supply curve so the equilibrium point moves to the right with the demand curve. This is represented in the following graph:

In the long run if scientists discovered that soybeans prevents cancer and heart disease this would shift the demand curve to the right. As a result the suppliers would be more willing to increase supplies because of the money they will receive for the more goods they produce. This shifts the supply curve to the right. The increase in supply decreases the equilibrium price but increases the demand. This is represented in the following graph:

ii) With the increase in the supply in soybeans the space for the feed corn to grow is reduced. Thus there would a shift in the supply curve to the left. This would mean a shift in the equilibrium price would rise. Thus feed corn would be selling for a higher price but the demand would be less. This is represented in the following graph:

B) i) The effect that nylon being invented would have on the domestic cotton industry is that the demand for cotton will decrease, shifting the demand curve to the left. Due to nylon being a substation for cotton. Thus the equilibrium price and supply will decrease. Meaning the sale of cotton will reduce which will in turn force suppliers to decrease the price of cotton. This is represented in the following graph:

ii) The effect the cotton gin being invented would have on the domestic cotton industry is that the supply curve would shift to the right due…