econ110_notes_for_final_-_yale - Problem Set 1#4 When a...

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Problem Set 1 #4) When a per-unit sales tax is added, either the Demand curve or the Supply curve shifts. Tax on Demand curve: left-shift (people will buy less if materials are taxed). Tax on Supply curve: left-shift (sellers need to increase price to make up for the tax). When the Supply curve is shifted, the point moves along the Demand curve . Thus, the new Price Equilibrium at this point is the price that consumers pay . When the Demand curve is shifted, the point moves along the Supply curve . Thus, the new Price Equilibrium at this point is the price that sellers sell at . Then, if you go straight down (in a Supply curve shift) or straight up (in a Demand curve shift) from the new Price Equilibrium , you will calculate what the other is paying. The difference is the tax that goes to the government. Problem Set 2 #4) Let p and q=2p be the prices of apples and bananas respectively. If you spend your 1 st dollar on apples, you can buy 1/p pounds of apples which gives you an extra utility of 1 util x 1/p . If you spend it on bananas you can buy 1/2p pounds of bananas which gives you an extra utility of 3 utils x 1/2p . Hence, you should spend this dollar on bananas. i.e. 1 (1/p) utils vs. 1.5 (1/p) utils. #5) The marginal utility for apples and bananas is 1 and 3 respectively. To see this, notice that an extra pound of apples (resp. bananas) increases your utility by 1 (resp. 3) and this is independent of how many apples and bananas you are consuming. Therefore, we have: 1/p < 3/2p. When we have MU(a)/ Pa < MU(b)/Pb, it means that you should decrease your consumption of good A and buy more of good B . But, in this instance you are already consuming zero units of good A and you cannot further decrease your consumption. Problem Set 3 #1) Need to solve for PE (price of exercise equipment) by plugging in given values for PV (price of exercise videos) and QE (quantity of exercise equipment). PV is given as 2, and QE will be zero to calculate the choke price . Then, using the own price-price elasticity formula ( E = P/(Pchoke – P) ). Now you plug in PE (also given) and the Pchoke (which you have found) to get the elasticity. #2) Complement goods >>> Cross-price elasticity = negative (+/-) or (-/+) Substitute goods >>> Cross-price elasticity = positive (+/+) or (-/-) Cross-price elasticity = (% change in Q e ) / (% change in P v ) … i.e. the change in quantity of one good over the change in price of the other good. #4) For linear demands, we know that Elasticity = P / (Pchoke – P) . The first demand curve has a choke price of 100, whereas the second has a choke price 50. Therefore, the second one, i.e. the one with the lowest choke price, is more elastic at any price . NOTE: that E = ( Q/ P) x (P/Q) … thus, when comparing 2 linear demand curves ( SEE 9/15 PACKET, p 11 ), the “P/Q” ratio differs greatly at any one price . i.e. the two points on the 2 lines have the same price, but one’s quantity is significantly larger than the other’s…which messes up the entire Elasticity equation.
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