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Introduction To Microeconomics

by: Tessa Tudor

Introduction To Microeconomics

Marketplace > University of Washington > Economcs > Introduction To Microeconomics
Tessa Tudor


Haideh Salehi-Esfahani

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About this Document

All Homework 3 explained in detail
Haideh Salehi-Esfahani
Study Guide
Economics, Microeconomics
50 ?




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This 4 page Study Guide was uploaded by Tessa Tudor on Wednesday April 23, 2014. The Study Guide belongs to a course at University of Washington taught by a professor in Fall. Since its upload, it has received 1620 views.


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Date Created: 04/23/14
Homework Help Assignment 3 1 Elasticity of demand at prices A BC When doing this problem you must calculate the percentage decrease of quantity demand during the price change FOR EXAMPLE when price rises from 8 to 9 quantity demanded decreases from 3 to 2 a 333 decrease Hence the elasticity of demand at the price of 8 e333 o125267 or e831 267 2 When the price of a good increased by 8 percent the quantity demanded of it decreased 4 percent The price elasticity of demand is A price rise will total revenue An example of a good with such a demand is dp 8 dq 4 e 84 5 increase toothpaste If a 8 percent increase in the price of a good decreases the quantity demanded by 4 percent then Price elasticity of demand 4 percent divided by 8 percent which equals 50 Total revenue Price x Quantity sold It the quantity demanded decreases by a smaller percentage than the price increases total revenue will increase With the price elasticity of demand equal to 50 demand is inelastic A necessity such as bread a good with poor substitutes such as toothpaste and a good that is broadly defined such as clothing are examples of goods that have an inelastic demand 3 One winter recently the price of home heating oil increased by 20 percent and the quantity demand decreased by 2 percent Use the total revenue test to determine whether the demand for home heating oil is elastic or inelastic Total Revenue because the percentage increase in the price is than the percentage decrease in the quantity demanded dp 20 o L 2 o The price increases by 20 percent and the quantity demanded decreases by 2 percent Because the percentage increase in the price is greater than the percentage decrease in the quantity demanded does total revenue increase or decrease Increases because the price increase is higher than the quantity demand decrease that difference allows for the price increase to overcome the decrease in quantity demand greater because of explanation above Part 2 Because total revenue and the price change in the demand for home heating oil is The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price of the good other things remaining the same If total revenue and the price of the good change in the same direction the total revenue test tells us that the demand for the good is inelastic 4 The price elasticity of demand for RusseII s popcorn is 22 Russell wants to increase his total revenue Russell should the price of his popcorn because the demand for popcorn is total revenue price x quantity elasticity 22 change in percent of quantity change in percent of price Lower elastic The price elasticity of demand for Russe s popcorn is 22 so the price elasticity of demand is elastic The relationship between the price elasticity of demand and total revenue is 1 if price and total revenue change in opposite directions demand is elastic 2 If a price change leaves total revenue unchanged demand is unit elastic 3 If price and total revenue change in the same direction demand is inelastic Because the price elasticity of demand is elastic for Russe s popcorn Russell will increase his total revenue if he lowers his price 5 The elasticity of demand for coffee is estimated to be 16 If the quantity demanded was 4 billion lbs per year when the price is 360 per Ib how much coffee would be demanded at 240 per lb This is a 33 percent decrease in the price of coffee Let x the percent increase in coffee consumption Assuming the elasticity does not change in this price range e 16 q 4 billion when p 36 per lb q x when p 24 per lb e change in percent of quantity change in percent of price 16 x33 x 1633 0528 therefore increase is O5284biion 211200000 coffee consumption thus becomes 4211200000 lbs 16 x42436 16 x412 1612 x4 192 x4 192 4 X x 4192 62 Aron spends his entire income on hamburgers and pizza His demand for burgers is inelastic If the price for hamburgers increase what happens to the quantity of pizza buyers total expenditure will increase since his demand for burgers is inelastic that means quantity will not change although price increases and therefore an increase and price and no change in quantity an increase in total expenditures if his income remains the same then Aron has less income to spend on pizzas because of his inelastic relationship with burgers if price of pizza doesn39t change Aron will decrease quantity of pizzas bought because of his inelastic relationship with burgers and therefore higher expenditure on burgers leaving less money for pizza Since his demand is inelastic when the price of hamburgers increases aron spends mrs on hamburgers than previously Since his income hasn39t changed he buys fewer pizzas With only two goods if the rice of a good with inelastic good changes The quantity of the other good consumed moves in the opposite direction of the price change The opposite is true if the demand is elastic 7 Explain why a firm that can choose whatever price it wishes will always st a price where demand is elastic As the quantity decreases costs must decrease Profits revenue minus cost must therefore be greater than at the original price and quantity sold 8 Bank the oods in order of increasin elasticit least elastic to most elastic whether a good is elastic or inelastic depends on the availability of substiutes Elastic goods are goods with numerous available substitutes whereas inelastic goods have few or no available substitues A generic cup of regular coffee probably has the fewest number of substitutes hence the demand for a cup of regular coffee is expected to be inelastic which is what has been observed 9 Here are more likely to find fine Italian leather goods New York went over this example in class but just like the shipping of good apples it is relatively cheaper to cell the italian leather over sea s rather than in italy after servicing fees 10 Man oun eo Ie re ard their elders as ri id and conservatives oun eo Ie are frequently idealistic and radical in the political sense and less inclined to follow traditional norms of behavior etc is this explained solely by some biological phenomena or changing tastes or acquisition of wisdom with advancing age young people stand to gain the most from changing their behavior because they have a longer lifetime ahead of them to pay for the costs incurred and enjoy the benefits from doing so Accordingly younger people are observed to change behavior more often than older people 11 In the past two centuries incomes in America have risen and the number of children families have chosen to have has decreased Does this mean the rich people are less fond of children than the poor people the decrease in the number of children per family can be explained by the higher cost of bringing up children in urban as opposed to rural settings


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