201Spring2011HW1SOLUTIONS

201Spring2011HW1SOLUTIONS - Solutions to Problem Set 1....

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Solutions to Problem Set 1. Microeconomic Theory 201, Spring 2011, University of Waterloo Questions marked with THINK are the most challenging. Question 1. 11 for 1 DVD 21 for 2 DVDs 30 for 3 DVDs 38 for 4 DVDs 45 for 5 DVDs 49 for 6 DVDs 49 for 7 DVDs a) How many DVDs will Henry buy if the price of each DVD at Movie Max is $5 ? 11 for 1st DVD 21-11=10 for 2nd DVD 30-21=9 for 3rd DVD 38-30=8 for 4th DVD 45-38=7 for 5th DVD 49-45=4 for 6th DVD 49-49=0 for 7th DVD Because the marginal bene±t from the 5th DVD exceeds the marginal cost (7 > 5) but the marginal bene±t from the sixth DVD is below the marginal cost (4 < 7) Henry buys 5 DVDs. b) THINK How many DVDs will Henry buy if Movie Max only sells DVDs in pairs and the price of each bundle of two DVDs at Movie Max is $10 ? 21 for 1 pair of DVDs (equals total willingness to pay for 2 DVDs) 38 for 2 pairs of DVDs (equals total willingness to pay for 4 DVDs) 49 for 3 pairs of DVDs (equals total willingness to pay for 6 DVDs) 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
49 for 4 pairs of DVDs (equals total willingess to pay for 8 DVDs) 21 for 1st pair 38-21=17 for 2nd pair 49-38=11 for 3rd pair 49-49=0 for 4th pair Because the marginal bene±t from the 3rd pair of DVDs exceeds the marginal cost (11 > 10) but the marginal bene±t from the 4th pair of DVDs is below the marginal cost (0 < 10) Henry buys 3 pairs of DVDs. Question 2. Assume that the demand curve for candy bars is D ( p ) = 100 3 p , where p is the price of a candy bar Candy bars are produced and sold by a monopolist with the cost curve C ( Q ) = 2 Q; where Q is the quantity of candy bars produced. TR = pQ; where Q is quantity. We then substitute the D ( p ) = 100 3 p for Q to get TR = p (100 3 p ) ( p p ) (100 3 ( p p )) p (100 3) = p (100 3 ( p p p (100 3 ( p p )) p (100 3) = p (100 3 p p p (100 3 p p ) p (100 3) = p p p (100 3 p p ) p (100 6 p p ) p : p (100 3 p p ) p = (100 6 p p ) 2
Background image of page 2
Setting p = 0 MR = 100 6 p The total costs are 2 Q; where Q is the quantity sold. We then substitute the demand curve D ( p ) = 100 3 p for Q in total costs 2 Q to get Total costs = 2 (100 3 p ) : The change in total costs when price increases from p to p p is thus 2 (100 3 ( p p )) 2 (100 3 p ) = p The rate of change in total costs
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/23/2011 for the course ECON 201 taught by Professor Vandewaal during the Spring '09 term at Waterloo.

Page1 / 11

201Spring2011HW1SOLUTIONS - Solutions to Problem Set 1....

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online