Q1) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good. Illustrate all of these scenarios graphically.
1. The population increases and the price of inputs increase.
2. The price of a complement increases and technology advances.
3. The number of firms in the market increases and income increases.
4. Price is expected to increase in the future.
5. Consumer preference increases and the price of a substitute in production decreases.
Q2) Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario A: Toll rate in 2012: $10.00. Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012, only 81.6 cars will use the toll roads in 2016.
Scenario B: Toll rate in 2012: $10.00. Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012, only 96.2 cars will use the toll roads in 2016.
1. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2.
2. Assume 10,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016?
3. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain.
(For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)