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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?