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Important information about Demand and Supply Curves

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2 A ) Every demand curve must eventually hit the quantity axis because with limited incomes there is always a price so high that there is no demand for the good.

B) If the elasticity of demand for long-distance calls is 1.5 and the price of long- distance calls falls by 20 percent as a result of increased competition from the telecommunications bill that passed two years ago, households on average will spend less in the total on long distance service.

C) In 2003, an econometrics class at Boston University estimated that the demand for lobsters in the United States was approximately a straight line intersecting the price axis at $87 per pound and intersecting the X - axis at 110 million pounds per year. The demand curve is very elastic.

7 Illustrate the following with supply and/or demand curves:

A) a situation of excess labor supply ( unemployment) caused by a minimum wage law

B) the effect of a sharp increase in heating oil prices on the demand for insulation material

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2A) False. If the Demand curve were to hit the Y-axis (quantity), that would mean that there is a limit to how many people want of something so that even if it were free, people would take no more of it. If electricity were free, people still could only use so much of it even with every electrical appliance running all day and what is more, they cannot store it.

B) False. They will spend more. The price elasticity of demand is the proportional change in the quantity purchased divided by the proportional change in price. So, with a price elasticity of 1.5, it means that for every dollar the price decreases, demand ...

Solution Summary

supply and demand curves explained with multiple choice examples.

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Important information about profit maximizing price

A firm is considering building a bridge. The cost to build the bridge is $2 million with no maintenance costs. The following table shows demand for bridge:

Price per crossing # of crossings
$8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800

a. What is the profit maximizing price?

b. What is the efficient level of output? why?

c. If the firm is interested in maximizing profit, should it build the bridge?

d. If the government was to build the bridge, what price should the government charge?

e. Should the government build the bridge? Why?

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