# Week 3 Quiz

(TCO A) There is a decrease in the cost of labor for producing bicycles.

(4 pts.) What happens to bicycle supply?

(6 pts.) What happens to bicycle demand?

Student Answer: When there is an increase in the price of labor for making bicycles the supply would decrease because it would cost more to make the bikes and the supply curve would shift to the left. There would be no change in the demand for the bicycles. Instructor Explanation: Since a change in costs to produce the product is a supply factor, a decrease in costs would be expected to increase bicycle supply. Remember that supply is a schedule of how many units suppliers are willing to offer at different prices. When costs fall, the supply curve increases

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b. For this question the point elasticity formula is best since it contains all of the important elements in the one formula. Since Ed = %change Q / %change P, according to the point elasticity formula rearranging the equation and solving for %change Q, gives us %change Q = (%change P)(Ed). Thus, in this case, %change Q = (9) (1.3) = a decline of 11.7 percent.

c. This question can be answered in 2 ways: (1) You could calculate the elasticity in the $35 - $20 range. This is [(300 - 180) / 480/2] / [(20 - 35) / 85/2] = [120 / 240] / [15 / 43] = 0.50 / 0.55 = -0.909, rounding. Since we have slightly inelastic demand in this range we know that lowering price will result in an DECREASE in total revenue; or (2), Simply calculate the total revenue at the two prices -- at $20 total revenue is $20 x 300 = $6,000, and at $35, total revenue is $35 x 180 = $6,300. So total revenue DECREASES when the price is lowered to $20 from $35. Points Received: 10 of 10 Comments: well done

6. Question :

(TCO B) For a given labor supply, would the potential unemployment impact of an increase in the minimum wage be greater in the case of elastic or inelastic demand for labor? Explain why, using hypothetical numbers to illustrate your case.

Student Answer: The unemployment rate would go