HW 3 answers - Economics 101-300 Winter 2008 Practice...

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Economics 101-300 Winter, 2008 Practice Problems Problems: 1) In an attempt to decrease the amount of drinking on college campuses, state legislators decide to raise the price of beer by 10%. If beer has a price elasticity of demand of 2, by what percent will the quantity of beer demanded decrease as a response to the price increase? Answer: 20%. Price elasticity of demand is given by the following formula: Demand elasticity = Percentage change in quantity demanded Percentage change in price Therefore: 2 = Percentage change in quantity demanded 10% 20% = Percentage change in quantity demanded 2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: If, as the price of beer increases, you find that the total expenditure spent on beer in the state has decreased by more than the percentage increase in the price of beer, then the absolute value of the price elasticity of demand on beer is: a) Smaller than 0 b) Greater than 0 but smaller than 1 c) Greater than 1 d) Equal to 1 e) Equal to 0 Answer: Total expenditure = Price * Quantity. If price increases by 10% and total expenditure decreases by 20%, then quantity must have fallen by more than 10%. The elasticity is bigger than 1. 3) Suppose Kata consumes only two goods, Ginger Ale and bread. Her income is $24. The price of a Ginger Ale is $2 a can and the price of a loaf of bread is $4. The following table indicates Kata’s preferences over the two goods, where MU stands for marginal utility. Quantity 1 2 3 4 5 6 7 8 MU of Ginger Ale 28 24 20 16 14 12 4 2 MU of Bread 40 32 24 20 16 12 8 4
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If Kata is a utility maximizing consumer, Kata will consume ____ cans of Ginger Ale and ____loaves of bread, giving her a total utility of____: 4) You are the manager of a small city. You have to find a way to make your city bus system take in more revenue. The bus system is in competition with automobiles, taxis, and the metro. Your staff recommends raising the bus fare to increase revenue, but at a community meeting about the issue, bus riders argued that reducing the fare will increase revenue because more people will ride the bus.
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