Question

1. Consider an individual demand function g 100-5P a. Solve for inverse demand. Plot. b. Suppose the market consisted of 5 buyers, each having the same individual demand. Find and plot the market demand c. Use the found market demand to determine the price (and quantity) that would maximize sellers revenue (assuming 1 seller). Ililustrate. (Attempt) If the seller's costs were $5 per unit, what would be the seller's profit-maximizing price and quantity? Illustrate your solution. d. 2. Suppose a consumer has budget of $120 per week to spend on food. Consumer can choose to eat at restaurants (R), in which case he spends about $20 per meal (PA-$20), or spend his money on All-Other-Food (PAo-$1). Illustrate consumer's budget line. Plot R on the horizontal axis. If consumer's utility function is U=R"AOF, what will be his optimal bundle? what would be the value of his utility at optimal bundle? How much money will he have left for other food after spending part of the budget on restaurants? Recall from class that the slope of an indifference curve is utility is a simple product of quantities is MRS -X/Y (in our case MRS AOF /R). Calculate the value of slope of an indifference curve along consumer's budget line at R-1, 3, 5, 7, 9 (that would be her willingness to pay for the 1t, 3, etc restaurant meal). Use this information to sketch consumer's demand for restaurant meals Suppose consumer's budget increased (got a good job after graduating from college) to $200. Sketch the new optimum and contrast against the old. How will this increase in budget change consumer's willingness to pay for the 1" restaurant meal?. 3" meal? Suppose the price of restaurant meals increased to $30 (budget is back to $120. Sketch the optimum. How will this increase in budget change consumer's willingness to pay for the 1 restaurant meal?.. 3" meal? a. b. c. d. f. (Attempt) Suppose now that consumers preferences changed - consumer is dating someone and willing to pick up the restaurant tab (sometimes)! That is, consumer's utility now is U#R"*AOF and MRS . 2 AOG/R. How will this change consumer's optimum how many R's and how many AOF's)? will t affect consumer's willingness to pay for the 1" restaurant meal? 3 meal?

Answer 1

The inverse demand curve is written as price as a function of quantity. The market demand curve is the horizontal summation of individual demand curves of the individual. To maximize profit, given the marginal cost we have to equate marginal cost with marginal revenue from production.