ECON 101 – Prof. Gaudin
Problem Set #2 PS2 – answer key – Page 1 of 3
Expected answers are in bold. Explanations are added in regular font. Note that I indicated in parenthesis the points
given for each questions. There are 65 points total.
1. (18) – Note that you are told that nothing but the variables in the table affects demand changes. The months
themselves do not affect demand directly, only though weather, preferences, etc. So the fact that months were
changing should not have prevented you from looking at elasticities. However, there were three variables that affect
the quantity demanded of tacos: price of tacos, price of pizzas and income. To calculate each type of elasticity we
needed to make sure that only one variable was changing and the other two stayed constant across two points.
(a) (3) No. There are no two points on the same demand curve so that when the price of taco meals changes,
either income changes or the price of pizza changes or both
(b) (3) No.,since we do not have 2 points on the same demand curve
(c) (3) Yes. Use March and November. We need the price of pizza to change while income and the price of tacos
(and everything else that would affect demand) stay constant.
(d) (3) Yes. Use January and November or March and September We need the income to change while the
price of tacos and the price of pizza (and everything else that would affect demand) stay constant.
(e) (6)
- Cross-price elasticity between Taco meals and Pizza is expected to be POSITIVE because Pizza and
Taco meals are substitute goods.
- Income elasticity for Taco meals is expected to be positive because or rather IF we believe that Taco
meals are a NORMAL good, negative if we believe they are INFERIOR goods. In the example it is
a normal good.
2. (12) a. (2) 20 (per day)
b. (2) 12 (per day)
c. (3) by 1000 or more per day (so the total is 2000 or more). Equivalently, if the number of
accidents more than doubled (100% more) then the law was a bad idea.
d. (5) We are looking at the risk elasticity of demand for reckless driving (or carelessness) when
reckless driving directly translates into accidents. For the law to be effective in reducing the total
number of deaths, we want
%# ( )
1
%
change in of accidents due to reckless driving
change in risk of death per accident
ε
=<
3. (20)
S
D
Q
P$
600
500
400
200
10000
6667 20000
S long run
Shortage (shorter run)
Long-run shortage
(The shortage increases!)
