Econ_102A_PS3_Answer

# Econ_102A_PS3_Answer - P e=P^-2[P(1/P = P^-2*P^2 = 1 Thus...

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Problem Set 3 Solutions #1) Clearly, the lump sum scheme puts the consumer on a higher indifference curve than the per unit tax. #2) Clearly, the lump sum scheme puts the consumer on a higher indifference curve than the per unit subsidy.

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3) a) Q=1/P e=-1/slope * (P/Q) First lets figure out what the slope of the demand curve is. The first thing we need to do is to invert the cyrve by solving for P (because P is the Y-Axis variable). So P=1/Q. Then the measure of the slope of a demand function is dP/dQ. But 1/slope is = dQ/dP. So differentiate Q=1/P with respect to P to get dQ/dP= -1/P^2 = 1/slope. Now substitute this into the elasticity formula to get e= P^(-2)*(P/Q) but Q=1/P so substitute this in for Q to get the entire formula in terms of
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Unformatted text preview: P: e=P^(-2)*[P/(1/P)] = P^(-2)*P^2 = 1. Thus the curve is everywhere unit elastic. b) Q=100-P P=20 Q= 80. -1/slope is simply the coefficient on P in the demand function which in this case is -1. Thus we have e= -1/-1*20/80= ¼. c) Q=100-2P e=1 1= -1/slope *P/Q. We know the 1/slope term is just the coefficient on P which is -2. e=1=2*P/Q. Multiply through by Q to ger Q=2P. But we know from the demand equation that Q also equals 100-2P. Thus 100-2P = 2P so 4P=100 and P=25 Q= 50. 4) see solutions to PS2 #1 and substitute the values for prices and income in. The solution will be exactly the same....
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## This note was uploaded on 02/03/2010 for the course ECON econ102a taught by Professor Bandy during the Winter '09 term at UC Riverside.

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Econ_102A_PS3_Answer - P e=P^-2[P(1/P = P^-2*P^2 = 1 Thus...

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