1. The price elasticity of demand for gasoline in Neverlane is -.20. a. The only
ID: 1101824 • Letter: 1
Question
1. The price elasticity of demand for gasoline in Neverlane is -.20.
a. The only gas station in the town of Neverlane, is considering an increase in the price of gas. If the goal of the gas station is to maximize revenue, should it go ahead with the price increase?
b. Would you expect price elasticity of demand for gas in Neverland to be more elastic or less elastic if a new gas station opens up in the town? Why?
2. Alex's utility function for consuming coffee and sugar is U=min(2c,s)? Prices of the two goods are Pc=$4 and Ps=$2 respectively.
a. Plot Alex's indifference curves on a graph. Draw a budget line for Alex on the same graph if his monthly income is $500.
b. What is optimal bundle of consupmtion for Alex if he spends all his income on consuming coffee and sugar? Show the optimal bundle on the graph.
c. How does his optiomal bundle changes if the price of Coffee increases to $6? Plot the new budget line and optimal bundle on the graph.
3. Use the three assumption on preferences to answer the following problems. You may answer yes, no or uncertain. Explain your answer.
a. Tina prefers Mac over PC and prefers PC over Unix. Does Tina prefer Unix over Mac?
b. Vicky prefers Burberry over Coach and prefers Michael Kors over Burberry. Does Vicky prefer Burberry over Prada?
c. Which bundle will Maya choose - (1) 1 bottle of coke, 2 hotdogs, 1 ice cream sundae and 1 basket of wings; or (2) 1 bottle of coke, 1 hotdog, 1 icecream sundae, 1 basket of wings and 25 french fries?
4. The demand and supply functions for the market for oranges are Qd = 80-8P and Qs =40+2P respectively.
a. What is the elasticity of demand at the equilbrium?
b. What is the excess demand/excess supply if price of oranges is $3?
c. What is the excess demand/excess supply if the price of oranges is $1?
Explanation / Answer
1)
a)Yes, it should rise price in order to raise revenue as elaticity is < 1
b) No change
3)
a) No. simple as A>B , B>C so , A> C
b)uncertain ;
c)uncertain ; it her choice
4) equilibrium qty and price , when Qd = Qs ; ie
q = 48 , p = 4 ;
a) elasticity of demand = slope of demand curve*(p/q) = (-8)*(4/48) = -0.66
b) Qd = 56 , Qs = 46 ; excess demand = 56 - 46 = 10
c) Qd = 72 , Qs = 42 ; excess demand = 72 - 42 = 30
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