Download Unit 3 Questions And Solutions

a. Suppose the initial price and quantity on the
above demand curve is represented by point A
and then the price and quantity change to point
B. Calculate the percentage change in price and
the percentage change in quantity using the
following formula:
1. a. % change in price = [(9 - 10)/10] x 100 = -10%
% change in quantity = [(2 -1)/1] x 100 = 100%
b. Using the percentage changes you calculated
in part (a), calculate the price elasticity of
demand from point A to point B, using the
following formula:
b. Price elasticity of demand = |100%/ - 10%| = 10
2. Use the figure below of a linear demand curve
to answer this set of questions.
a. Based on the figure, fill in the following table:
b. At what price is total revenue maximized?
(Hint: This may be a price that is not included in
your table.)
b. From the table, we can see that total revenue
equals $30 when the price is $5 or when the price
is $6. At a price of $5.50- the midpoint of the
demand curve-we find that total revenue equals
$30.25. For a linear demand curve, total revenue is
maximized at the midpoint of the demand curve.
3. For each of the following pairs of goods,
identify which good is likely to have the
more elastic price elasticity of demand, and
then provide an explanation for your choice.
a. Golden delicious apples and all fruit
3. a. The price elasticity of demand for golden
delicious apples should be far more elastic than the
price elasticity of demand for all fruit because
there are many possible substitutions for golden
delicious apples and far fewer substitute goods for
all fruit. Hence, a price increase is likely to result
in a significant change in the percentage change in
the quantity demanded of golden delicious apples
and a far smaller percentage change in the
quantity demanded of all fruit.
b. Gasoline and ice cream
b. The price elasticity of demand for ice cream
should be greater than the price elasticity of
demand for gasoline because there are far more
available substitutes for ice cream than there are
for gasoline.
c. Leisure travel and business travel
c. The price elasticity of demand for leisure
travel should be greater than the price
elasticity of demand for business travel because
business travelers must get to their destinations
within a relatively small window of time and
hence are less sensitive to price than are
leisure travelers.
4. Suppose there are two goods, good C and
good D. The cross-price elasticity of demand
for these two goods is equal to -0.2.
a. What is the relationship between good C and
good D? Explain your answer.
4. a. A negative cross-price elasticity of
demand implies that the percentage change in
the quantity demanded of one good moves in
the opposite direction to the percentage
change in the price of a related good. Thus, if
the price of good Y increases, then the
quantity demanded of good X decreases. We
know that two related goods are either
substitutes or complements. In this case, a
negative cross-price elasticity of demand
indicates that the two goods are complements.
(In contrast, a positive cross-price elasticity of
demand tells us the two goods are substitutes.)
b. Suppose the price of good C increases from $1
to $2. What do you estimate will be the
percentage change in the quantity demanded of
good D? (Use the simple formula for percentage
changes rather than the midpoint method.)
c. Suppose the cross-price elasticity of
demand between two goods is negative and
you would like to sell more units of one of
these goods. What do you hope will
happen to the price of the other good?
Explain your answer.
c. When the cross-price elasticity of demand is
negative, a decrease in the price of one good will lead
to an increase in the quantity demanded of the other
good.
5. When Mario's income increases by 10%, his
consumption of noodles decreases from 100
units a year to 70 units a year, while his
consumption of salmon increases from 20 units a
year to 60 units a year.
a. What is Mario's income elasticity of demand for
noodles?
5. a. Income elasticity of demand for noodles =
5. When Mario's income increases by 10%, his
consumption of noodles decreases from 100
units a year to 70 units a year, while his
consumption of salmon increases from 20 units
a year to 60 units a year.
b. What is Mario's income elasticity of demand
for salmon?
b. Income elasticity of demand for salmon =
c. Is either of these goods income elastic for Mario?
c. Salmon
d. Is either of these goods income inelastic for Mario?
d. Neither good is income inelastic because
neither good has an income elasticity of demand
value that is positive but is less than one.
e. From Mario's perspective, is either of these
goods a luxury good? Explain your answer.
e. Salmon is a luxury good because the
value of the income elasticity of demand
for salmon is greater than one. As Mario's
income increases, his demand for salmon
increases at an even faster rate.
f. From Mario's perspective, is either of
these goods an inferior good?
Explain your answer.
f. Noodles are an inferior good because as
Mario's income increases, his demand for
noodles decreases. A negative value for the
income elasticity of demand indicates that
the good is an inferior good.
6. The following table describes a linear supply curve for bicycles in Microland.
a. Graph this supply curve and then write an equation for it in slope-intercept form.
6. a. p= (1/2)Q
b. Suppose suppliers initially sell bicycles for $200 but then decrease their
price to $100. Using the midpoint method, what is the value of the price
elasticity of supply between these two points on the supply curve?
b. Price elasticity of supply =
c. Suppose suppliers initially sell bicycles for $400 and then the price increases
to $500. Using the midpoint method, what is the value of the price elasticity
of supply between these two points on the supply curve?
c. Price elasticity of supply =
7. The following table expresses the amount people are willing to pay to buy a
new music playing device. Use this information to answer this series of
questions.
a. If the market price is $175, who will buy the good and what is the value
of total consumer surplus?
7. a. At a market price of $175, Mario and Mary will buy the good because
they are the only potential consumers who are willing to pay a price that is
equal to or greater than the market price. The value of consumer surplus is
$150. (Mario receives consumer surplus of $125, while Mary receives
consumer surplus of$25.)
b. Suppose the market price is $175, but a decision is made to allocate the two units of
the good that are demanded at that price to Mario and Lucinda. What is the value of
total consumer surplus in this case?
b . Mario has a consumer surplus of$300 - $175, or $125, while
Lucinda's consumer surplus is equal to $150 - $175, or-$25. The total
consumer surplus is therefore $100 when the two units are allocated to
Mario and Lucinda.
c. Why does the reallocation of the good in part (b) reduce the value of consumer
surplus? What are the implications of the reduction in consumer surplus that
occurs when the good is not allocated to those buyers who place the highest
value on it?
c. Consumer surplus is reduced when the good is reallocated
because the good goes to consumers who place a lower value on the
good. This type of reallocation, away from the market's allocation,
results in a failure to maximize consumer surplus.
8. The following table provides a list of sellers of organic apples and the lowest price
each seller is willing to accept for a bushel of apples. Assume that each seller will
offer only a single bushel of apples for sale. Use this information to answer this
series of questions.
a. Suppose the market price of apples is $7.00 a bushel. At this price, which of the
above potential sellers will agree to sell a bushel of apples? What is the value of
producer surplus when the market price of apples is $7.00 a bushel?
8. a. At a price of $7.00 a bushel, Ski Top Orchards and Red's Organic
will be willing to sell apples. The value of the producer surplus is $1.00
for Ski Top Orchards and $1.20 for Red's Organic, for a total producer
surplus of $2.20.
b. Suppose the market price of apples is $7.00 a bushel and that J. Appleseed's
Finest is forced to sell a bushel of apples while Ski Top Orchards is forced to not
sell a bushel of apples. When we reallocate sales according to this plan, what
happens to the value of producer surplus in this market?
b. When the sales in this market are reallocated away from the
market-determined allocation, this reduces total producer surplus.
Red's Organic's producer surplus is still $1.20, while J. Appleseed's
Finest's producer surplus is $7.00 - $7.25, or -$0.25. Thus, total
producer surplus under this reallocation plan is $0.95.
c. How does reallocation of sales away from the market-provided allocation alter the
value of producer surplus? What implications does this result have if your goal is to
maximize producer surplus?
c. Reallocation of sales away from the market-provided allocation
reduces total producer surplus. Producer surplus is maximized
when the market allocates sales of the good.
9. George is considering the purchase of some new shirts for work. He is
willing to pay $35 for the first shirt, $25 for the second shirt, and $15 for
the third. Oxford Clothiers, his favorite shirt manufacturer, currently is
selling shirts for $28 each. What is the efficient number of shirts for George
to buy? What is George's consumer surplus in this situation? Explain your
answers.
9. George will purchase one shirt because the price he is willing to pay
for that shirt ($35) is greater than or equal to the price Oxford Clothiers
must receive ($28) to be willing to sell the shirt. George will receive a
consumer surplus of$7 when he purchases this shirt. He will not
purchase two shirts because the value of the second shirt from George's
perspective ($25) is less than the seller's price ($28).
10. Mark consumes ice cream and hamburgers. The table below provides information
about the relationship between the quantity of ice cream and hamburgers, and the
total utility Mark gets from their consumption.
Mark's income for expenditure on ice cream and hamburgers is $50 per month, the
price of ice cream is $5 per cone, and the price of hamburgers is $10 per hamburger.
a. Complete the following table based on the above information.
b. Draw a horizontal line and label points along this line to correspond to the
different combinations of ice cream and hamburgers Mark can afford given his
income and the prices of the two goods. Moving from left to right along this
horizontal line, the number of ice cream cones increases while the number of
hamburgers decreases.
c. Graph the results from part (a) using two different graphs. In the first graph, put
the quantity of ice cream cones on the horizontal axis and the quantity of
hamburgers on the vertical axis. Draw Mark's budget line and label consumption
bundles A through E on this budget line. On a second graph, drawn just below the
first graph, draw Mark's total utility function. Measure Mark's total utility on the
vertical axis and the quantity of ice cream and the quantity of hamburgers on the
horizontal axis-you practiced drawing this horizontal axis in part (b) of this
problem. Moving from left to right along the horizontal axis, the number of ice
cream cones increases while the number of hamburgers decreases.
Label consumption bundles A through E on Mark's total utility curve.
d. Consumption bundle C is the consumption bundle that
maximizes Mark's utility at 112, given his tastes and preferences,
his income, and the prices of the two goods.
e. In the table below, calculate Mark's marginal utility per ice cream cone
(MUic), his marginal utility per dollar spent on ice cream (MUic/Pic), his
marginal utility per hamburger (MUh), and his marginal utility per dollar
spent on hamburgers (MUh/Ph). Remember that the price of ice cream is
$5 per cone and the price of hamburgers is $10.
f. Draw a graph of Mark's marginal utility per dollar spent on ice cream and
marginal utility per dollar spent on hamburgers. This graph's horizontal axis
should be labeled in the same manner as the one you drew in part (b) of this
problem, while the vertical axis should measure Mark's marginal utility per
dollar.
g. At the optimal consumption bundle C, what is the relationship between the
marginal utility per dollar spent on ice cream and the marginal utility per dollar
spent on hamburgers?