1. Assume that a consumer spends all her money on two goods. Given this assumpti

Question

1. Assume that a consumer spends all her money on two goods. Given this assumption, explain the consumer's budget line. How will this consumer reach the equilibrium on an indifference map.

5. Assume the following demand and supply functions for one bedroom apartments (monthly rent) in the City of Toadsuck, Arkansas :
Demand: Q = 1000 - .5p
Supply:   Q = 160 + .9p

How many apartments are available in the City? What is the monthly rent?

6. Go back to Question # 5. Assume that the City fixes the rent of those apartments at$500 per month. What will happen?

7. Assume that a department store was selling a name brand women's handbag at $1,200. At that price the store was selling 50 bags per week, which was not enough. So, they declared a sale of 30%. As a result, the store sold 200 bags per week.

Use the above information to calculate point elasticity of demand. Explain your result.

8. Below are estimates of elasticity of demand. Explain the type of good(s) each estimate indicates and explain what the coefficient indicates:

Note: You must "explain" each number, not just what type of elasticity.

Explanation / Answer

Please do rate the answer, I have given a lot of time to write this :)

1. A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can afford. In a two good case, we can think of quantities of good X on the horizontal axis and quantities of good Y on the vertical axis. It basically explains how the second good quantity changes when the other good consumption is increased or decreased .

the budget line should be tangent to the indifference curve to be in equilibrium . so the consumer adjusts his budget line by changing the quantities of 2 goods to make the buget line a tangent to the indifference curve .

5.

make D=S (for equilibrium)

1000-0.5*P=160+0.9*P

solve for P ,

P= $600 -----------monthly rent

to know how many appartments are available (which is supply, put the P we got in the supply equation)

S = 160+0.9*P = 160+0.9*600 = 700 (therefore 700 appartments are available)

6.

if city fixes rent at $500 which is less than the equilibrium price(600$), then the demand for the appartments INCREASE

7.

Point Elasticity of Demand=

% ? Q / Q

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