CHAPTER 2 1. The inverse demand curve for product X is given by: a. PX = 25 - 0.005Q + 0.15PY, where PX represents price in dollars per unit, Q represents rate of sales in pounds per week, and PY represents selling price of another product Y in dollars per unit. The inverse supply curve of product X is given by: PX = 5 + 0.004Q. b. Determine the equilibrium price and sales of X. Let PY = $10. c. Determine whether X and Y are substitutes or complements.
CHAPTER 2
1. The inverse demand curve for product X is given by:
a. PX = 25 - 0.005Q + 0.15PY,
where PX represents price in dollars per unit, Q represents rate of sales in pounds
per week, and PY represents selling price of another product Y in dollars per
unit. The inverse supply curve of product X is given by: PX = 5 + 0.004Q.
b. Determine the
c. Determine whether X and Y are substitutes or complements.
2. Suppose the cable TV industry is currently unregulated. However, due to complaints
from consumers that the price of cable TV is too high, the legislature is considering
placing a
government does make this price ceiling law, please construct a diagram that shows the
impact of this law on the cable TV market, and please briefly explain the effects on
market prices and quantities with supply and demand analysis. Also, if the cable TV
company is worried about disgruntling customers, the company may introduce a
different type of programming that is cheaper for the company to provide yet is equally
appealing to customers. What would be the effects of this action?
3. Harding Enterprises has developed a new product called the Gillooly Shillelagh. The
market demand for this product is given as follows:
Q = 240 - 4P
a. At what price is the price
b. At what price is demand infinitely elastic?
c. At what price is the price elasticity of demand equal to one?
d. If the shillelagh is priced at $40, what is the point price elasticity of demand?
CHAPTER 3
4. In the theory of
imply that indifference curves cannot cross. Which axioms imply this? Explain your
answer using a diagram and using words.
5. A consumer decides not to buy a VCR when her income is $20,000. However, when
her income rises to $30,000, she decides to buy one. In a single diagram, draw the
budget lines and indifference curves to illustrate this situation (assume the VCR costs
$300 in both time periods). Be sure to label your diagram completely.
6. An individual consumes products X and Y and spends $25 per time period. The prices
of the two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case
has a utility function expressed as:
U(X,Y) = 0.5XY MUX = 0.5Y MUY = 0.5X.
a. Express the budget equation mathematically.
b. Determine the values of X and Y that will maximize utility in the consumption of X
and Y.
c. Determine the total utility that will be generated per unit of time for this individual.
CHAPTER 4
7. Suppose the marginal rate of substitution is constant at 6 for all possible consumption
bundles. Next suppose that the price of good 1 decrease, and the ratio P1/P2 is greater
than 6. Show that the income and substitution effects from this price change are both
zero.
8. The following data pertain to products A and B, both of which are purchased by
Madame X. Initially, the prices of the products and quantities consumed are:
PA = $10, QA = 3, PB = $10, QB = 7.
Madame X has $100 to spend per time period. After a reduction in price of B, the prices
and quantities consumed are:
PA = $10, QA = 2.5, PB = $5, QB = 15.
Assume that Madame X maximizes utility under both price conditions above. Also,
note that if after the price reduction enough income were taken away from Madame X
to put her back on the original indifference curve, she would consume this combination
of A and B:
QA = 1.5, QB = 9
a. Determine the change in consumption rate of good B due to (1) the substitution
effect and (2) the income effect.
b. Determine if product B is a normal, inferior, or Giffen good. Explain.
9. Joe's Pig Palace sells barbecue plates for $4.50 each, and serves an average of 525
customers per week. During a recent promotion, Joe cut his price to $3.50 and observed
an increase in sales to 600 plates per week.
a. Calculate Joe's arc price elasticity of demand.
b. Joe is considering permanently lowering his price to $4.00 to increase revenue.
How many plates should Joe expect to sell at the new price? Does the move make
sense in the light of Joe's desire to increase revenue?
10. Sally Henin has a price elasticity of demand for gasoline of -0.8. Her income elasticity
for gasoline is 0.5. Sally's current income is $40,000 per year. Sally currently spends
$800 per year on gasoline. The price of gasoline is currently $1.00 per gallon.
a. A contemplated excise tax on gasoline will cause the price of gasoline to rise to
$1.40. What impact will the tax have on Sally's consumption of gasoline?
b. Since the purpose of the tax is only to discourage gasoline consumption, Congress
is considering a $200 income tax rebate to lessen the burden of the gasoline tax.
What impact will the rebates have on Sally's consumption of gasoline?
c. Assume that both the tax and rebate are implemented. Will Sally be worse off or
better off?
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