Key to Midterm 1

# Key to Midterm 1 - P Q 16 240 Solutions 8 120 1) EQ,P = -1...

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P Q 16 240 8 120 E Q,P = -1 Solutions to the Midterm 1 1) As given, Lindsay consumes F = 10 and C = 2 with an income of 24. Initially (with P F = P C = 2) she spends all her income: P F F + P C C = 2(10) + 2(2) = 24. To buy her initial basket at the new prices, she would only need to spend P F F + P C C = 1(10) + 4(2) = 18. Thus, her initial basket lies inside her new budget constraint (assuming her income stays at 24). With her new budget line she would be able to choose a new basket to the “northeast” of (i.e., a basket involving more food and clothing than) her initial basket, making her better off. 2) In case of the linear demand Q = A - bP , we know that Using the values of P and Q given in the problem we have . Now we can solve for the second parameter of the linear demand curve . Hence the linear demand curve is given by equation Q d = 240 – 15 P . There exist several linear demand curves for which the demand is equal to 120 at price of \$8. Information about elasticity of demand lets us determine exactly one

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## This note was uploaded on 05/11/2011 for the course ECON 301 taught by Professor Sheng during the Spring '11 term at ITT Tech Pittsburgh.

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Key to Midterm 1 - P Q 16 240 Solutions 8 120 1) EQ,P = -1...

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