Finance 475

Problem Set #3


1)      Suppose that at a price of $10 per CD, the quantity demanded of CDís is 40.  When the price of CDís falls to $8, the quantity of CDs demanded rises to 60.  Calculate the elasticity of demand for CDs.  Is demand elastic or inelastic?

2)      Suppose that the U.S. exports wheat and imports televisions.  For simplicity, assume that Japan is Americaís only trading partner. U.S. exports supply and import demand can be represented by the following information. Assume that the world prices of wheat and TVís  (in Yen) are Y280 and Y18, 000 respectively.  Assume for simplicity that neither the U.S. nor Japan can affect these world prices.


Price of Televisions  (in U.S. $s)

Quantity of TVís imported (thousands)









Price of Wheat  (in U.S. $s)

Quantity of Wheat Exported (millions)









a)      Do the export supply and import demand functions for the U.S. satisfy the Marshal-Lerner condition?  Explain.

b)        Calculate dollar demand and dollar supply for the following yen/dollar exchange rates: (in Y/$) 80, 100, 120, 140

c)      What is the equilibrium exchange rate between the U.S. and Japan?

3)      Explain the relationship between the Marshal-Lerner condition and the presence of the J-Curve.  Why is it not likely for a J-Curve to persist for long periods of time?

4) Suppose that the U.S. imports petroleum and Television Sets from Japan.  If the U.S. were to experience a 10% currency depreciation, which market do you   think would experience the greatest effect in terms of volume?  How about in terms of price?