Unit 4 Assignment: Elasticity of Demand Name: Course Number and Section: Date: General Instructions for all Assignments: 1. Unless specified differently by your course instructor, save this...

Unit 4 Assignment: Elasticity of Demand

Name:

Course Number and Section:

Date:

General Instructions for all Assignments:

1. Unless specified differently by your course instructor, save this assignment template to your computer with the following file naming format:

Course number_section number_last name_first name_unit number

2. At the top of the template, insert the appropriate information:

Your name, course number and section, and the date

3.
Insert
your answers below, or in the appropriate space provided for in the question. Your answers should follow APA 6th edition format with citations to your sources and,
at the bottom of your last page, a list of references. Your answers should also be in Standard English with correct spelling, punctuation, grammar, and style (double-spaced, in Times New Roman, in 12–point, and black font). Respond to questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions.

4. Upload the completed Assignment to the appropriate Dropbox.

5. Any questions about the Assignment, or format questions, should be directed to your course instructor.

Assignment:

In this Assignment, you will focus on marginal utility, Price Elasticity of Demand, and understanding the difference between Price Elasticity of Demand and Income Elasticity of Demand.

We all subconsciously assign “scores” to what we are considering to purchase, based on our expected level of “satisfaction” (Marginal Utility) with that purchase. When making simultaneous pairs of purchases, again we subconsciously compare the amount of “satisfaction” (Marginal Utility) that we will receive from the pair of purchases. To decide on the “ideal” combination of these two purchases, we expect that the last dollar we spend on each of the items will give us the “same” satisfaction per dollar (Marginal Utility per dollar). Further, we know that the MORE of an item that we get, the next one we get will give us LESS “satisfaction” (Marginal Utility) than the last one gave us (the Law of Diminishing Marginal Utility). Using what you have learned about Marginal Utility and Marginal Utility per dollar, answer the following questions.

Questions

1. Jane has been working all day, missing both her breakfast and lunch. Finally able to leave work, after being required to work a couple of overtime hours, she is starving. Jane has $20 in her pocket, so she stops at a local fast food restaurant and orders a grilled chicken sandwich and an order of fries. As she sits down to eat them, a University student approaches her and tells her that she is doing a research project for her microeconomics course, and would like to ask Jane a few quick questions. Jane agrees and the student asks what “score” (marginal utility) from 1 to 100 would she give as her satisfaction level with the 1^st
sandwich and the 1^st
fries? After eating that order, Jane is still hungry and orders a second chicken sandwich and another order of fries. Again, the student asks Jane to give her new scores. Since Jane has not eaten all day, she is hungry enough to order a third round of food and again gives “scores” to the inquisitive student.

Below is the University student’s completed experiment tally sheet of Jane’s marginal utility “scores” and the calculation of her
marginal utility
per dollar
, given that each sandwich costs $4.00, and each order of fries costs $2.00. Her
budget is $20.

The student filled in the shaded cells based on Jane’s responses, then computed the values in the remaining cells. Using this information, answer the following questions:

Student’s completed experiment tally sheet.
Available budget is $20.

a. Is Jane maximizing her utility? Explain your reasoning and show any calculations. (2 points)

b. If Jane is not maximizing her utility, remembering the Law of Diminishing Marginal Utility, would she be better off to buy one
less
chicken sandwich
and
one
more
order of fries? Explain your reasoning and show any calculations. (2 points)

c. If Jane is not maximizing her utility with the original purchase combination, remembering the Law of Diminishing Marginal Utility, would she be better off buying just one
more
order of fries? Explain your reasoning and show any calculations. (2 points)

d. If Jane is not maximizing her utility with the original purchase, remembering the Law of Diminishing Marginal Utility, would she be better off buying one
less
order of fries
and
one
more
chicken sandwich? Explain your reasoning and show any calculations. (2 points)

2. Remembering the Learning Activity in Unit 3, in the year 107 WBCE (Way Before the Common Era) the Gondwanaland Chairman of Production reported that the gosum berry growers could meet an average demand of 700 barrels of gosum berries per month at an average a price of $70 per barrel.

In the year 108 WBCE, the growers were plagued with a gosum berry bug infestation that reduced average output, causing production to fall to only 600 barrels per month, causing the price to rise to $84 per barrel. The following table shows the Chairman’s report:

a. Using the
midpoint method, calculate the
price elasticity of demand
for Gondwanaland gosum berries. Explain what this price elasticity of demand means? (6 points)

b.
Complete the table below
by calculating what the monthly average total revenue is for year 107, what the monthly average total revenue is for year 108, and the change in average total monthly revenue for these two years. How have these numbers changed? (4 points)

c. Using your answer to part a. above, how could you have
predicted
the change in total monthly revenue that you found in part b. above? (6 points)

3. The Gondwanaland Chairman of Production reported that the new Altair chariots (most modern, horse drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and explain why you think they are true, or false.

a. A 20% increase in the price of the Altair chariot will cause the quantity demanded to fall by an astounding 60%. (4 points)

b. An increase in Gondwanaland consumers’ incomes will cause prices to rise, but the total quantity demanded will also increase. (4 points)

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References: