Question

s. The price elasticity of dend for a popular sporting event is 2. the price of a ticket to this A. Decrease by 5 percent Vent increases by 10 percent the grantity of ticket demanded B. Decrease by 20 percent C. Decrease by 10 percent D. Decrease by 0.2 percent . Ir a consumer has completely allocated his or her bod d if the ratio of marginal utility to price of good A is greater than that of good B, then in order to increase happiness the consumer should buy more of good A and less of good B. A True B. False Price Demand C F Quantity 7. Consider the demand curve above. If area (ABC is smaller than area ODEF, we may conclude that demand in this range is: A. Price-inelastic B. Income inelastic C. Price-elastic D. Income-elastic 8. The price elasticity coefficients are 2.6, 5, 1.4, and .18 for four different demand schedules D1, D2, D3, and De respectively. A 2 percent increase in price will result in an increase in total revenues in which of the following cases? A D and D3 B. Di and D4 C. D2 and D4 D. D1, D2, and Ds

Answer 1

Answer

5. B. Decreases by 20 percent.

Let , the price elasticity of demand for a good = $\varepsilon$_d

$\therefore$$\varepsilon$_d= Percentage change in quantity demanded for a good / Percentage change in its price  

As the price of a good and its quantity demanded change in opposite direction, so ' $\varepsilon$_d' is negative(-).

Here, $\varepsilon$_d= 2; Price of the ticket increases by 10 percent

So, 2 = Percentage change in quantity demanded for tickets / 10%

$\therefore$   Percentage change in quantity demanded for tickets = 2 * 10% = 20%

So, if the price of the ticket to this event increases by 10 percent, the quantity demanded of tickets will decrease by 20 percent.

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6. A. True

The consumer has completely allocated his budget on two goods, good A, and good B. The ratio of marginal utility of good A(MU_A) to its price(P_A) is greater than the marginal utility of good B(MU_B) to its price(P_B).

I.e., MU_A / P_A $>$ MU_B / P_B

The equilibrium condition says, that the ratio of marginal utility of a good to its price will be same for all goods the consumer purchases.

So, for equilibrium, MU_A / P_A = MU_B / P_B

Now, as  MU_A / P_A $>$ MU_B / P_B , the consumer will substitute good A for good B, i.e., he/she will increase the consumption of good A, and will decrease the consumption of good B. Higher the consumption of good A, lower will be the utility from good A, and thus the MU_A will decrease. On the other hand, the lower the consumption of good B, higher will be the utility from good B, and thus MU_B will increase.This will continue, until, the marginal utility of money spent on each good is same , i.e. MU_A / P_A = MU_B / P_B

So, in order to increase happiness, the consumer should buy more of good A and less of good B.

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7. C. Price-elastic

The area OABC is the revenue, when price is 'OA', and quantity demanded is 'OC'. The area ODEF is the revenue, when price is 'OD', and quantity demanded is 'OF'.

Given that, OABC $<$ ODEF

We see that OA $>$ OD

So, from the figure, if we assume, that price rises from OD to OA, the revenue decreases.Again, if we assume, that price decreases from OA to OD,the revenue increases.

From this, we conclude that the demand in this range is price-elastic. In case of elastic demand, the price of a good,and revenue( price * quantity) change in opposite direction. When the price elasticity of the demand for a good is elastic, the quantity demanded of the good changes more than the change in its price. So, when the price of the good rises, then the quantity demanded of the good falls more than the rise in its price. As a result, the revenue from the good falls. Similarly, when the price of the good falls, then the quantity demanded of the good rises more than the fall in its price. As a result, the revenue from the good rises.

We conclude, the demand in this range is price-elastic.

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8.C. D₂, and D₄

Demand schedule = D₁ ; Price -elasticity coefficient = 2.6

'Demand schedule = D₂ ; Price -elasticity coefficient = 0.5

Demand schedule = D₃ ; Price -elasticity coefficient = 1.4

Demand schedule = D₄ ; Price -elasticity coefficient = 0.18

In case of inelastic demand, i.e., when price elasticity of demand $<$1, an increase in price increase revenues.

So, a 2 percent increase in price will increase in total revenues for demand schedule D₂, and D₄. The demand schedule D₂, and D₄ show inelastic demand.

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