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Economics 202
Problem Set 2
Brief Answers
1.
We might expect P to increase and Q to decrease.
Since the elasticity for medical care is less
than one, we might expect that total revenue collected by doctors would increase as would,
therefore, total expenditures by consumers.
2.
P = 40 – 2Q for P > 20
P = 30 – Q for P < 20
3.
A)
MU
P
/ P
P
= 20 <
MU
M
/ P
M
= 24 so buy more M.
B)
MU
P
/ P
P
= 20 =
MU
M
/ P
M
= 20 so OK.
C)
MU
P
/ P
P
= 21 >
MU
M
/ P
M
= 56/3 so buy more P.
4.
Optimal bundle is (Champagne, Caviar) = (3,4) where the MU per dollar is 7.
5.
a) C = 6.
b) Use 1) MU
G
/ P
G
= MU
C
/ P
C
and 2) P
C
C + P
G
G = I. That is, 1) (C+1)/2 = G/1 and
2) 2G + C = 22.
Solving these equations yields C = 10.5 and G = 5.75.
6.
First use P
X
X + P
Y
Y = I or 2(3) + 1(4) = I to learn that I = 10.
Then use both parts of the
Optimal Purchase Rule to solve to get X = 2.5, Y = 5.
7.
The answer is CS = Total Benefit – Total Cost = area of the triangle with base 8 and height 16
[= (204)] = ½ (204)(8) = $64.
8. A) Since for any P the quantity demanded increased when income rose, the good is normal.
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 Spring '07
 ZELDER
 Economics, Microeconomics

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