Question

3 22. Provide three separate numerical example and demonstrate how to compute price-elasticity, income-elasticity, and cross-elasticity of demand 23. Provide two different demand lines and demonstrate which one is more elastic 24. Explain the meaning of each of the following a) Absolute value of price elasticity of demand for gasoline is 0.28 in the short-run but 0.58 in the long-run. What explains the difference? b) Income-elasticity of demand for potatoes is +2.3. What kind of good (normal or inferior) potatoes are? Your classmate argues that cross-elasticity of demand for Pepsi and Coke is -1.8. Does this make sense? Explain. d) c) Price-elasticity of supply is +10 25. Explain how you as a consumer decide to spend your budget on different goods and services 26. Provide a numerical example and demonstrate how consumers achieve maximum total utility under the Utility Approach to Consumers' Demand theory 27. Consider two products such as X and Z and draw four sets of Indifference curves for four different individuals who prefer: A lot of X and little Z a) b) A lot of Z and little X. c) A little of X and Z A lot of X and Z d) 28. Explain what an Indifference Curve show and why two Indifference Curves should not intersect. 29. Suppose a budget of $2,000 and price of two goods X and Z are $5 and $10, respectively. Construct a Budget line. Then superimpose a set of indifference curves on this budget line and demonstrate how consumers maximize utility 30. What does a short-run production function show? 31. Provide a numerical example and show how to compute Total, Average, and Marginal Product of labor in the short-run. 32. Present all necessary graphs and discuss three different stage of production.

Answer 1

Answer 22.

Suppose

Initial price P1= $10

Initial quantity Q1= 500

New price P2= $20

New quantity Q2= 400

Price Elasticity of demand= percentage change in quantity demanded/ percentage change in price

=((Q2-Q1)/(Q2+Q1))÷((P2-P1)/(P2+P1))

= ((400-500)/(500+400))÷((20-10)/(20+10))

=((-100/900)÷(10/30))

= -1/3

= -0.333

Income elasticity of demand= percentage change in quantity demanded/ percentage change in income

Initial income I1 = $10000

New income I2= $12000

Initial quantity= 24

New quantity= 30

=((Q2-Q1)/(Q2+Q1))÷((I2-I1)/(I2+I1))

=((30-24)/(30+24))÷ ((12000-10000)/(12000+10000))

=((6/54)÷(2000/22000))

= 11/9

= 1.22

Suppose

Initial price Py1= $2

Initial quantity Qx1= 80

New price Py2= $4

New quantity Qx2= 40

Cross Price Elasticity of demand= percentage change in quantity demanded of good X/ percentage change in price of good Y

=((Qx2-Qx1)/(Qx2+Qx1))÷((Py2-Py1)/(Py2+Py1))

= ((40-80)/(80+40))÷((4-2)/(4+2))

=((-40/120)÷(2/6))

= (-1/3)÷(1/3)

= -1