I guess that the circumference of the earth is about:

5,00

0 m

iles

10,0

00 m

iles

15,0

00 m

iles

25,

000 m

iles

30,0

00 m

iles

35,0

00 m

iles

45,0

00 m

iles

55,0

00 m

iles

65,0

00 m

iles

75,0

00 m

iles

2% 2%

4%

24%

4%

14%

13%

11%

15%

12%

1. 5,000 miles

2. 10,000 miles

3. 15,000 miles

4. 25, 000 miles

5. 30,000 miles

6. 35,000 miles

7. 45,000 miles

8. 55,000 miles

9. 65,000 miles

10. 75,000 miles

The circumference of the earth is about:

5,00

0 m

iles

10,0

00 m

iles

15,0

00 m

iles

25,

000 m

iles

30,0

00 m

iles

35,0

00 m

iles

45,0

00 m

iles

55,0

00 m

iles

65,0

00 m

iles

75,0

00 m

iles

1% 0%

3%

59%

2%4%

3%3%

16%

9%

1. 5,000 miles

2. 10,000 miles

3. 15,000 miles

4. 25, 000 miles

5. 30,000 miles

6. 35,000 miles

7. 45,000 miles

8. 55,000 miles

9. 65,000 miles

10. 75,000 miles

What is it really?

• 24,901 miles

Firms in an industry have $500 fixed costs, variable costs of $20 per unit, and capacity of 50 units. In the long run there is free entry and

exit. What is the long run equilibrium price?

20 50 30 25

13%5%

79%

3%

1. $20

2. $50

3. $30

4. $25

A competitive firm has fixed costs of $10,000, capacity of 1000 and variable costs

of $5 per unit. In the short run if the price of

the good falls from $15 to $7.50, the firm will

Pro

duce z

ero

Pro

duce 1

000

units

Pro

duce 5

00 u

nits

.

Pro

duce 2

50 u

nits

.

13%3%

11%

73%

1. Produce zero

2. Produce 1000 units

3. Produce 500 units.

4. Produce 250 units.

A competitive firm has fixed costs of $10,000, capacity of 1000 and variable costs

of $5 per unit. In the short run if the price of

the good falls from $15 to $4, the firm will

Pro

duce z

ero

Pro

duce 1

000

units

Pro

duce 5

00 u

nits

.

Pro

duce 2

50 u

nits

.

83%

1%3%13%

1. Produce zero

2. Produce 1000 units

3. Produce 500 units.

4. Produce 250 units.

And on to our lecture…

If the demand curve is a downward-sloping straight line, then the

elasticity of demand is the same everywhere along the line.

Tru

e

Fal

se

29%

71%1. True

2. False

Why is that?

• The elasticity of demand is NOT the slope of the demand curve. It is the ratio of percentage change in quantity to percentage change in price.

• Read p 411 of textbook to see how to calculate elasticity along a straight line demand curve.

The price elasticity of demand for rental housing is –1, and the price elasticity of supply is +1/4.

Municipal authorities set a rent ceiling 20% below the equilibrium price. The number of units

rented

Incr

ease

s by

20%

.

Dec

reas

es b

y 20

%.

Dec

reas

es b

y 5%

.

Incr

ease

s by

25%

.

Dec

reas

es b

y 10

%.

18%15%

4%10%

52%

1. Increases by 20%.

2. Decreases by 20%.

3. Decreases by 5%.

4. Increases by 25%.

5. Decreases by 10%.

Why is that?

• The price quantity combination moves along the supply curve. (Landlords are not compelled to rent.)

• Since supply elasticity is ¼ , a 20% fall in price leads to a 5% fall in quantity supplied.

The supply curve is horizontal at $10. The demand curve has formula P=100-

Q. A sales tax of $10 per unit is imposed.

What is the excess burden of this tax?

20 30 40 50 60

49%

16%

2%

23%

10%

1. $20

2. $30

3. $40

4. $50

5. $60

Here is the picturePrice

Quantity

100

100

$10

$20

A

Slope of demand curve is –1.Excess burden is Triangle AArea of A is 10x10/2=50

P=100-Q

Happy Trails…