In-Depth
Assignment 1
Principles of
Microeconomics
Name___________________________________ Date
CALCULATION AND ESSAY.
Write your answer in the space provided.
Be sure to show your work in detail.
1)
Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15
million gallons a day were sold. In
October 2004, the price averaged $2.15 a gallon and 14 million gallons were
sold. If the demand for gasoline did not shift between these two months, use
the midpoint formula to calculate the price elasticity of demand. Indicate
whether demand was elastic or inelastic.
Calculations
and explanations:
2) For
each pair of items below determine which product would have the higher price
elasticity of demand (in absolute value).
a. Insulin for a diabetic or aspirin for someone
suffering a headache.
b. A new Whirlpool 27 cu.ft. side-by-side
refrigerator or electricity to power your all-electric home.
c. A can of Red Bull or soft drinks in general.
3) Explain the relationship between
price elasticity of demand and total revenue.
4) Suppose that at a price of $55, 100
units were sold while at a price of $33, 153 units were sold. Without calculating the price
elasticity value, can you determine whether demand is elastic, unit-elastic, or
inelastic? Explain your answer. Hint: refer to question 3.
Calculations
and explanations:
5)
The Mass Rapid Transit (MRT) System in Hong Kong has been running significant
losses. Transport Ministry officials have argued over whether to raise fares to
combat the losses. One argument against a fare increase is that it will
aggravate traffic congestion on the streets during peak commuter hours. Suppose
that the current fare is $4 and the government is considering raising it to $6.
Officials estimate that this reduces the number of rides purchased from 10,000
to 8,000 per day.
a. What
is the estimated elasticity of demand for MRT rides?
b. What
does this elasticity of demand suggest to you about what will happen to total
revenue earned by the transit system?
c. Last
year, the MRT system incurred a loss of $50,000 per day. Do you think the fare
increase will resolve the deficit problem as well as Ministry officials
anticipate? Explain.
Calculations
and explanations:
6)
Eliza consumes 12 cappuccinos and 8 apple turnovers per week. The price of
cappuccino is $4 each and apple turnovers are $1 each.
a. What
is the amount of income allocated to cappuccino and apple turnover consumption?
b. What
is the price ratio (the price of cappuccino relative to the price of apple
turnovers)?
c. Explain
the meaning of the price ratio you computed.
d. If
Eliza maximize utility, what is the ratio of the marginal utility of cappuccino
to the marginal utility of apple turnovers?
e. If
the price of apple turnovers falls, will Eliza consume more apple turnovers,
fewer apple turnovers or the same amount of apple turnovers? Explain your
answer using the rule of equal marginal utility per dollar.
Calculations
and explanations:
7)
Arnie Ziffel has $20 per week to spend on any combination of pineapples and
green tea. The price of a pineapple is $4 and the price of a bottle of green
tea is $2. The table below shows Arnie’s utility values. Use the table to
answer the questions that follow the table.
Quantity of
Pineapples
Total Utility
Marginal Utility
Marginal Utility
per Dollar
Quantity of Green
Tea
Total Utility
Marginal Utility
Marginal Utility
per Dollar
1
32
1
28
2
52
2
46
3
64
3
54
4
68
4
60
5
70
5
64
6
71
6
66
7
71
7
67
a. Complete
the table by filling in the blank spaces.
b. Suppose
Arnold purchases 4 pineapples and 2 bottles of green tea. Is he consuming the
optimal consumption bundle? If so, explain why. If not, what combination should
he buy and why?
Calculations
and explanations: