Transcript Midterm exam - Vermont Chinese School

CDAE 254 - Class 14 Oct. 11
Last class:
4. Market demand and elasticities
Class exercise
Today:
4. Market demand and elasticities
Review for the midterm exam
Quiz 4 (Chapter 4)
Next class:
Midterm exam
Important dates:
Pick up your quiz 4 anytime after 1:00pm, Oct. 12
Answer key to problem set 4 will be in the website …
Midterm exam: Tuesday, Oct. 16
Problem set 4
This problem set will not be collected and answer key
will be posted in the website before the midterm exam.
Six problems:
4.1., 4.2., 4.4., 4.6., 4.7., and 4.8
4. Market demand and elasticity
4.1. Market demand curves
4.2. A general definition of elasticity
4.3. Price elasticity of demand
4.4. Income elasticity of demand
4.5. Cross-price elasticity of demand
4.6. Empirical studies of demand
4.7. Applications
4.4. Income elasticity of demand
(1) What is income elasticity of demand?
The percentage change in the quantity
demanded of a good (Q) in response to a 1%
change in income.
eQ , I
Percentage change in Q

Percentage change in I
Q
Q I
Q



I
I
Q
I
4.4. Income elasticity of demand
(2) Range of income elasticity of demand:
< 0 inferior good
< 1 inelastic
= 1 unit elastic
> 1 elastic
(3) An example:
When the average monthly income increased
from $2000 to $2200, printer demand increased
from 100 to 125. What is the income elasticity of
demand for printer?
4.4. Income elasticity of demand
(4) Another example:
Q = 200 + 0.005 I - 0.02 P
where Q = demand for computer
I = average income
P = average price
What is the income elasticity of demand when
the average income is $30,000 and the average
computer price is $1,500?
4.6. Cross-price elasticity of demand
(1) Definition: The percentage change in the
quantity demanded of a good (Q) in response to
a 1% change in the price of another good.
eQi , Pj
Percentage change in Qi

Percentage change in Pj
Q i
Qi Pj
Qi



Pj
Pj Qi
Pj
4.6. Cross-price elasticity of demand
(2) How to calculate cross-price elasticities?
(1) When we have two observations:
e.g., the demand for pork increased from 100
to 110 when the price of beef increased
from 3 to 3.6, what is the elasticity of
pork demand with respect to beef price?
(2) When we have a demand function:
e.g., Qpork = 40 - 2 Ppork + 0.5 Pbeef
What is the elasticity of pork demand with
respect to beef price when the pork price is 4
and beef price is 6?
Class Exercise
(Tuesday, Oct. 9)
For demand function Qc = 300 – 0.3Pc – 0.1Pp + 0.05 I , where
Qc is the demand for laptop computers in a market, Pc is the
average price of laptop computers, Pp is the average price of
printers and I is the average income. If we know the average
laptop computer price is $800, the average printer price is $100
and the average income is $20,000, calculate:
(1) the income elasticity of demand for laptop computers:
(2) the own-price elasticity of demand for laptop computers:
(3) the cross-price elasticity of demand for laptop computers
with respect to the average price of printers.
4.7. Empirical studies of demand
(1) Examples of estimated demand elasticities
(2) Estimation of demand functions (regression
analysis)
(3) How to estimate demand elasticity from demand
equation?
(4) Elasticity matrix (e.g., demand for animal
products in urban China)
Demand elasticities in urban
China
Marshallian price elasticity of good i with respect to good j
Expenditure
Elasticities
Marginal
Budget %
Pork
B&M
Poultry
Eggs
Fish
Milk
Pork
0.8327
39.14
-0.8503
-0.1305
0.0876
0.0844
-0.0130
-0.0227
B&M
0.8492
7.26
-0.7002
-0.6745
0.0907
0.2301
0.1736
0.0717
Poultry
1.4895
17.11
0.0549
0.0092
-1.3362
-0.5057
0.2939
-0.0068
Eggs
0.9858
14.00
0.2380
0.1281
-0.3448
-0.7766
-0.1902
0.0132
Fish
1.1909
19.99
-0.2067
0.0544
0.2337
-0.2000
-1.0253
-0.0629
Milk
1.2689
0.0250
-0.8070
0.2608
-0.0303
0.0281
-0.5703
-0.2884
Chapter 4: Review questions
(1) What is a market demand function (curve) and how to draw it
from individual demand curves?
(2) How does a change in income or the price of another commodity
shift a market demand curve?
(3) What is the general definition of elasticity and how to calculate it
and how to interpret it?
(4) How to calculate a price elasticity from (a) two observations and
(b) a demand function?
(5) What is the relation between price elasticity and total revenue and
(market share)?
(6) How to calculate an income elasticity from (a) two observations
and (b) a demand function?
(7) How to calculate a cross-price elasticity from (a) two observations
and (b) a demand function?
(8) How to examine the relation between two commodities according
to their cross price elasticities?
Midterm exam
1. What will be covered in the exam?
2. What will be the format?
3. What are the study materials and practice problems?
4. What do you need to bring to the exam?
5. Suggestions
Midterm exam
1. What will be covered in the exam?
-- Chapter 1 -- Chapter 4
-- Approximate distribution:
Chapter 1
Chapter 2
Chapter 3
Chapter 4
10 - 15%
25 - 30%
25 - 30%
30 - 35%
Midterm exam
2. What will be the format?
-- Multiple-choice questions (about 45-50 points)
(e.g., interpretation of an income elasticity of 0.4)
-- Problems (about 25 - 35 points)
(e.g., calculate a demand elasticity)
-- Graphical analysis (about 15 - 25 points)
(e.g., draw a demand curve and estimate CS)
Midterm exam
3. What are the study materials and practice
problems?
Quiz 1 to Quiz 4
Class exercises
Class examples
Lecture notes (class 01 -- class 14)
Problem sets
Textbook (Chapter 1 to Chapter 4)
Midterm exam
4. What do you need to bring to the exam?
-- Your calculator
-- A ruler will be helpful
-- No formula sheet is needed
Midterm exam
5. Suggestions
a. Go over each quiz and make sure you understand
and know how to answer every question in every quiz
b. Go over each class exercise and make sure you
understand and know how to answer every question
c. Go over the lecture notes, especially for the classes
you missed
d. Go over your problem sets and Chapters 1-4 of the
textbook
e. Study hard and feel confident!