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Unformatted text preview: Homework Assignment 2: Utility, Demand and Design Managerial Economics Swiss Federal Institute of Technology Fall Semester, 2010 Prof. Thomas Rutherford Due Thursday, November 18, 2010 November 16, 2010 1 Some True-False Questions 1.1 Elasticity The demand for personal computers can be characterized by the following point elasticities: price elasticity (-5), cross-price elasticity with software (-4), and income elasticity (2.5). Indicate whether each of the following statements is true or false, and explain your answer. A. A price reduction for personal computers will increase both the number of units demanded and the total revenue of sellers. B. The cross-price elasticity indicates that a 5% reduction in the price of personal computers will cause a 20% increase in software demand. C. Demand for personal computers is price elastic and computers are cyclical normal goods. D. Falling software prices will increase revenues received by sellers of both computers and software. E. A 2% price reduction would be necessary to overcome the effects of a 1% decline in income. 1.2 Indifference Curves Suggest briefly whether each of the following statements about indifference curves that show preferences between goods and services is true or false and defend your answer. A. Consumers prefer higher indifference curves that represent greater combinations of goods and services to lower indifference curves that represent smaller combinations of goods and services. B. Indifference curves slope downward because if the quantity of one consumer product is reduced, the quantity of the other must also decrease to maintain the same degree of utility. C. The slope of an indifference curve shows the rate at which consumers are willing to tradeoff goods and services. 1 D. The fact that indifference curves do not intersect stems from the more is better principle....
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