ECO2003F EDU Workshop 3.pptx

Quantity price ela stic inelastic r15 what is the

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Quantity Price Ela stic Inelastic R15
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What is the income elasticity of demand if the price of beer is R15 per litre and GDP is R3000 billion? Slope is -1/3 Y is GDP = 3000 Q = 8500 (calculated in previous question
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What is the total revenue of the industry if GDP is R3000 billion? We are on the inelastic portion of the demand curve % change in P > % change in Q Therefore Increase price will increase TR If the industry were to increase its total revenue, should it increase or decrease the price of beer? Explain. Before we can use our formula We need to solve for Q. Luckily we’ve solved for this in the previous question
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Find the price level where the industry should set the price of beer where it would maximise revenues if GDP is R3000 billion. What is the associated quantity and the total revenue. We maximize total revenue when MR = 0 First find TR = P x Q Then take first derivative of TR to get MR Set MR = 0 And solve Manipulation of original equation
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Elasticity
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This means you can either A) Not spend R200 000 now, ie, save R200 000 earn 25%, and then use R200 000 + i + R300 000 all in the future (C2) B) B) Not spend R300 000 in the future and rather spend now, ie, borrow R300 000 and pay 20%, and then use all in the current period (C1) Option A implies No consumption in C1, total consumption in C2 is: 200 000 (1+0.25) + 300 000 = 550 000in future period (C2) Option B implies No consumption in C2, total consumption is in period C1: 200 000 + 300 000/(1+0.25) = 440 000 in current period (C1) Intertemporal consumption bundles Question 4 Consider a person who knows the future with great accuracy. He knows that he will die at the end of period 2 and that he cannot leave anything to his children because the state does not allow that. His income in period 1 is R200 000 and his income in period 2 is R300 000. The interest rate is 25%. He can borrow against his future income at this rate and he can save his current income at the same rate. As he is a miserly kind of guy, he spends only R100 000 in period 1, and the rest in period 2.
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Lets assume you receive: 200 000 income now (Current C1) 300 000 income in the future (Future C2) i = 25% Intertemporal consumption bundles C1 C2 550 000 440 000 This means you can either A) Not spend R200 000 now, ie, save R200 000 earn 25%, and then use R200 000 + i + R300 000 all in the future (C2) B) B) Not spend R300 000 in the future and rather spend now, ie, borrow R300 000 and pay 20%, and then use all in the current period (C1) Option A implies No consumption in C1, total consumption in C2 is: 200 000 (1+0.25) + 300 000 = 550 000 in (C2) Option B implies No consumption in C2, total consumption is in period C1: 200 000 + 300 000/(1+0.25) = 440 000 in (C1) C2 intercept = 200 000 (1+0.25) + 300 000 = 550 000 C1 intercept = 200 000 + 300 000/(1+0.25) = 440 000 Slope = 550000/ 440000 Slope = - 1.25 Slope = - (1 + i )
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Lets assume you receive: 200 000 income now (Current C1) 300 000 income in the future (Future C2) i = 25% Option A implies No consumption in C1, total consumption in C2 is: 200 000 (1+0.25) + 300 000 = 550 000 in (C2) Option B implies No consumption in C2, total consumption is in period C1: 200 000 + 300 000/(1+0.25) = 440 000 in (C1) As he is a miserly kind of guy, he spends only R100 000 in period 1, and the rest in period 2 C1 C2 550 000 425 000 100 000 440 000 Y = mx + c C2 = -(1+i) + 550 000 C2 = -1.25 + 550 000 C2 = -1.25(100 000) + 550 000 C2 = 425 000
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Lets assume you receive:
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