202--S08 PS 2 SN

# 202--S08 PS 2 SN - Economics 202 Problem Set 2 Brief...

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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 [= (20-4)] = ½ (20-4)(8) = \$64. 8. A) Since for any P the quantity demanded increased when income rose, the good is normal.

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## This note was uploaded on 09/08/2010 for the course ECON 202 taught by Professor Zelder during the Spring '07 term at Northwestern.

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202--S08 PS 2 SN - Economics 202 Problem Set 2 Brief...

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