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Econ 281 Winter 2017 Assignment 1
University of Alberta
Department of Economics
Economics 281 – B4
Intermediate Microeconomics Theory I
L. Priemaza
Assignment #1
Part A – Short Answer
Answer the following from course material. Justify your answers.
1) What is economics?
2) In the game of rock-paper-scissors, the three variables are what you pick, what your
opponent picks, and the outcome. What are the 1 exogenous and 2 endogenous
variables? Why?
3) When Kat increases the price of her Valentines Day chocolates by 2%, quantity demanded
decreases by 3%. Did Kat’s revenue increase or decrease? Why?
4) What are positive and normative economic statements? Give one positive economic
statement and two normative economic statements about the law of supply for flu shots.
5) What is the law of diminishing marginal utility? Give an example using movies.
Part B – Medium Answer
Answer the following from course material. Show all work.
1) After an Italian election, you need to send the local Don who won a congratulations gift of
pasta (P) and meatballs (M). You don’t really like the local Don, so you want to minimize
your expenditure while still ensuring they achieve a minimum utility of 120 (to make sure
you don’t “take along walk along a short pier”). If Pp=$10 and P M=$1, minimize
M
expenditure given the following utility: U  30 min( P, ) . Include a graph.
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2) Explain Inferior goods both using a demand graph and an Engel curve.
3) Using composite goods, explain why someone would save for retirement. Include a graph
with ALL intercepts correctly listed.
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Econ 281 Winter 2017 Assignment 1
Part C – Long Answer
Answer the following from course material. Show all work.
1) The two hottest apps in 2017 are Angry Elephants (E) and Angry Donkeys (D). Supply and
demand are as follows. The price of Angry Donkeys is originally $4:
QEd  12  PE  PD
QEs  PE
a) Calculate equilibrium.
b) The price of Angry Donkeys increases to $6. Recalculate equilibrium and show the
result of (a) and (b) on a graph.
c) Calculate the elasticity shown by the above change. Explain what it means and what it
reveals about the relationship between these two apps.
2) Granny Smith likes apples (A) and oranges (O). Originally the price of oranges is $1, and
her utility is below:
U  100 AO,
MU A  100
O
A
, MU O  100
A
O
a) Calculate maximum utility if PA=$1 and I=20.
b) Recalculate maximum utility if the PA=$2 and I=$20. (Note: Decimals are acceptable)
c) Graph the solutions to (a) and (b) twice, showing both the price consumption curve
(show axis intercepts) and a demand curve for A.
d) Derive the demand curve for apples. Rewrite the demand curve in the form QD=f(P).
(Hint: Do NOT use the data from a or b.)
Assignment is due in Tory 8-14 by 3:45 pm Wednesday Feb 15th. It is the student’s
responsibility to ensure assignment is handed in. Assignments can be handed in up to
24 hours late for a 15% penalty. These assignments must be time-stamped.
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