Questions for Next Time
Supply, Demand and Elasticity

1. A recent article in The Wall Street Journal discussed the trend in home sales. Last year there were record sales of 5.1 million new and used houses despite the fact that there was a 10 percent rise in the median price of new homes. At the time, the median price of homes was $53,500. Given your knowledge of the market system, can you explain this puzzling result - a positive relationship between the change in price and sales? (Ignore inflation.)

2. Use a supply-demand diagram to demonstrate the following situations:

a. recession's impact on the market for domestic automobiles

b. impact of drought on the cereal market

c. impact of mechanization in agriculture on the market for grains

d. impact of the Bank of England's decision to reduce its holdings of gold on the price of gold

e. price decline in gold associated with the recent downward revisions in expected inflation

f. impact on stock prices of the aging of the baby boomers

g. impact on the price of rental housing of the shortening of depreciation schedules and the elimination of passive income loss restriction

h. impact of IBM compatibility feature of new Apple computers on the market for Apple computers

i. the existence of scalpers at the World Series games

j. impact of minimum wage legislation on the market for unskilled workers

k. the decision on the part of the Brazilian government to burn some coffee so that it would not reach the marketplace

3. Find a headline in a newspaper or magazine that is related to price changes and convert the words in the article to a supply-demand graph.

4. Assume that someone high up has found out that you have mastered many of the basic economic principles and you are asked to be a consultant to the Bay Area Transit Authority. Your job is to raise revenue. You need to decide on the appropriate price change - should you increase or decrease the tolls on the bridges coming into San Francisco?

5. At this time I would like you to consider the possibility of raising the sin taxes (booze and butts) to raise revenue. Do you think it will work? For example, would you propose a rise in the RI sin taxes as a way of raising additional revenue, some of which may be earmarked for higher education?

6. A common belief is that the demand for gasoline is inelastic. Some even suggest this is one of the reasons why the expenditures on foreign oil continue to increase as the price of oil increases. To study the demand for gas, a group recently conducted a study in which they interviewed a number of Shell gasoline stations scattered around the country. The results showed a price elasticity of demand to be 1.43. Should this be taken as proof of an elastic demand for gas? Explain the basis for your decision in a brief memo. This is not a statistics question.

7. What impact will the internet have on demand elasticity?