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Week 4
Managerial Economics
Order of Business
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Homework
Assigned Lectures
Other Material
Lectures for Next Week
Homework
Pashigian, p 86, Exercise 2-2
Year
1987
1988
1989
1990
1991
1992
PX
100
110
90
100
100
100
Q
80
90
100
100
90
110
PY
50
40
40
50
40
40
Income
20,000
18,000
18,000
20,000
20,000
25,000
Year
1987
1988
1989
1990
1991
1992
PX
100
110
90
100
100
100
Q
80
90
100
100
90
110
PY
50
40
40
50
40
40
Years to calculate 
Income
20,000
18,000
18,000
20,000
20,000
25,000
Year
1987
1988
1989
1990
1991
1992
PX
100
110
90
100
100
100
Q
80
90
100
100
90
110
PY
50
40
40
50
40
40
Income
20,000
18,000
18,000
20,000
20,000
25,000
Bias due to changes in preferences
Year
1987
1988
1989
1990
1991
1992
PX
100
110
90
100
100
100
Q
80
90
100
100
90
110
PY
50
40
40
50
40
40
Complements or Substitutes
Income
20,000
18,000
18,000
20,000
20,000
25,000
Year
1987
1988
1989
1990
1991
1992
PX
100
110
90
100
100
100
Q
80
90
100
100
90
110
PY
50
40
40
50
40
40
Income
20,000
18,000
18,000
20,000
20,000
25,000
Price elasticity of Y; no year
Suppose the demand function for a
product is Q = 150 - 12p. Compute the
point elasticity of demand at Q = 30.
Then compute the arc price elasticity of
demand over the interval Q= 40 to Q =
30; over the interval Q = 31 to Q = 30;
over the interval Q = 30.1 to Q = 30.
Comment on the pattern of these price
elasticities.
Pr ice
10
  Slope
 12  4
Quantity
30
Q-High
40.0
31.0
30.1
Q-Low
30
30
30
P-High
9.17
9.92
9.99
P-Low
10
10
10
Eta
-3.28571
-3.91803
-3.99168
Explain whether you agree or disagree with the
following statement: An economist would
classify a new automobile that does not start in
cold weather as an inferior good. (Apologies
for giving this question given the recent
weather, but it IS a good question).
Explain whether you agree or disagree with the
following statement: An economist would
classify a new automobile that does not start in
cold weather as an inferior good. (Apologies
for giving this question given the recent
weather, but it IS a good question).
Does the quantity demanded
increase or decrease with
income?
Suppose the demand function for a product is
Q = 150 - 12p. The good is currently selling
for $5. Compute consumer surplus. Then
compute the deadweight loss if the
government imposes a tax of $2 on each unit
sold.
Q=150-12P
$5
90
$12.5
Q=150-12P
7.5
$5
90
90
$12.5
Q=150-12P
7.5
$5
90
90
$12.5
Q=150-12P
7.5
1
1
CS  BH  (90)(7.5)  $337.50
2
2
$5
90
$90
$12.5
Q=150-12P
$7
$5
66
90
$12.5
DWL=$24
Q=150-12P
$7
$5
66
90
A consumer does not subscribe to
satellite TV, and lives in an area
where there is no cable TV.
Describe in words the shape of his
indifference curves between
satellite TV and other goods. Tell
me what you can tell about their
shape?
OG
He gets more
utility from
doing without
satellite TV
than he would
with.
S
Lectures for this Week
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The Economics of Bads
The Value of Time
Consumer Surplus
Applying Consumer Surplus
Consumer Surplus and Deadweight Loss
More on Consumer Surplus
The Economics
of Bads
The Value of
Time
Consumer
Surplus
Applying
Consumer
Surplus
Consumer Surplus
and Deadweight
Loss
More on Consumer
Surplus
Lectures for Next Week
• Consumer Surplus and Indifference
Curves
• Priceline and E-Bay
• Compensated Demand Curves
• Income and Substitution Effects
• Uncertainty
• Uncertainty and Risky Behavior
• Buying Insurance
• A Numerical Problem
• Who Robbed C.C.
•Consumer
Surplus and
Indifference
Curves
•Priceline and EBay
•Compensated
Demand Curves
•Income and
Substitution
Effects
•Uncertainty
•Uncertainty and
Risky Behavior
•Buying Insurance
•A Numerical
Problem
•Who Robbed
C. C.