ECON103_Fall08_Assignment1 - ECON 103 Fall 2008 Simon...

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ECON 103, Fall 2008 Simon Fraser University Assignment 1 Due in tutorial in the week of September 22 nd Do Problem 16 from Chapter 4 (5 marks) Problem 1 (5 marks) Janet has the following demand curve for oatmeal Q = 10 - 2 P , where P is price per pound and Q is pounds of oatmeal she purchases every month. (a) Suppose that price of oatmeal in her local grocery store is 3 dollars/pound. How many pounds will Janet buy at this price? Find Janet’s total expenditure on oatmeal, her consumer surplus and the total value of the quantity that she will buy at that price. Show your results on a diagram. (b) Suppose next to the grocery store there is a store called ‘Save on Oats’ that sells oatmeal for $1.50 per pound, but in order to shop there Janet has to buy membership which costs 5 dollars per month. Should Janet purchase the membership? Be careful, this is a trick question. Problem 2 (5 marks) Consider the following demand function: P = 10 - . 5 Q . Calculate TR and elasticity of demand when price is equal to 9, 7.5, 5, 2.5 and 1. Show your results on diagrams with the demand curve and a plot of TR against Q . (2 marks) If you did not make a calculation mistake you should observe the result that when demand is elastic decrease in price will increase the total revenue. Use the concept of elasticity to explain in your own words why this happens. (3 marks) Problem 3 (5 marks)
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