pes16pset3sol - Principles of Economics W1105.002 Spring...

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Principles of Economics W1105.002 Spring 2016 Prof. Musatti Student Name: _______________________ UNI __________________________ Section Number_____________________ Problem Set 3 - Solutions 1. In mid July, Delta Air Lines, the world biggest airline, started offering fare discounts on national and international travel. The air carrier lowered ticket prices by an average 15 percent. The sale, valid only for travel through November 17 th , gave Delta’s revenues a very needed boost after a somewhat dissatisfactory summer season. a) During early fall, is demand for air travel elastic or inelastic? b) Why do you think Delta gave discounts only for travel through November 17 th ? a) Price-elastic as a price decline led to an increase in revenue. b) The demand for travel becomes price-inelastic around Thanksgiving. 2. Lilly Davis has $5 per week to spend on any combination of ice cream and candy. The price of an ice cream cone is $2 and the price of a candy bar is $1. The table below shows Lilly's utility values. Use the table to answer the questions that follow the table. Quantity of Ice Cream Cones Total Utility Marginal Utility Marginal Utility per Dollar Quantity of Candy Total Utility Marginal Utility Marginal Utility per Dollar 1 20 20 10 1 20 20 20 2 38 18 9 2 34 14 14 3 52 14 7 3 48 14 14 4 62 10 5 4 54 6 6 a) Complete the table by filling in the blank spaces. b) Suppose Lilly purchases 2 ice cream cones and 1 candy bar. Is she consuming the optimal consumption bundle? If so, explain why. If not, what combination should she buy and why?
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