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# Assignment 3 Chs. 5, 6 &amp; 7 Instructions: Show work for all solutions, and explain your answers completely and clearly.55pm eastern. (9 pts.

Assignment 3
Chs. 5, 6 & 7
Instructions:

1. Please review the examples in the ppts, chapters, and the Student Workbook carefully before you start working on the assignment.
2. Show work for all solutions, and explain your answers completely and clearly.

Assignment 3
Chs. 5, 6 & 7
Instructions:

1. Please review the examples in the ppts, chapters, and the Student Workbook carefully before you start working on the assignment.
2. Show work for all solutions, and explain your answers completely and clearly.

Assignment 3 Chs. 5, 6 & 7 Instructions: 1. Please review the examples in the ppts, chapters, and the Student Workbook carefully before you start working on the assignment. 2. Show work for all solutions, and explain your answers completely and clearly. 3. Please submit the assignment by no later than Monday, March 11, 11:55pm eastern. 4. I have given you plenty of time (2 weeks) to complete the assignment. But please do not procrastinate . 1. (9 pts.) Suppose the price of X is \$30 and the price of Y is \$60. Using this information and the indifference curves denoted by U 1 and U 2 and the budget constraint lines given in the diagram below answer the following questions. Y 3 0 X 4 0 B A U 1 U 2 0 1 4 2 4 U n i t s o f g o o d X U nits of good Y a. If U 1 is the highest level of utility the consumer can achieve, what is the consumer’s income? b. How many units of Y is the consumer buying at the utility maximizing point A? c. If the consumer’s budget line now shifts up and becomes tangent to the utility (indifference) curve indicated by U 2 , what is the consumer’s income now? d. When the consumer is maximizing utility under this budget constraint, he is purchasing 14 units of Y as shown by point B in the graph. How many units of X is also the consumer purchasing at point B? e. What are the values of the slopes of the budget lines shown in the diagram, and what does the slope of a budget line tell us?
2. (4 pts.) Suppose a store sells 1,000 units of a product when the price is \$8.50 and sells 1,150 units when the price is \$7.75. a. Compute the arc price elasticity of this product, and determine whether the demand for this product is price elastic or inelastic. b. Suppose the store fixes the price of this product at \$8.50. At this price, the store sells 1,000 units when the average income of the customers is \$35,000 per year and sells 1,500 units when the average income of the customers rises to \$36,000 per year. Compute the arc income elasticity of demand, and determine whether the product is income elastic or income inelastic. 3. (4 pts.) Suppose the demand equation for good X is: Q x = 4000 – 40P X . For each of the following prices, calculate the point price elasticity of demand, and state whether demand is elastic, or inelastic, and what will happen to total revenue if price is decreased or increased. a. The price of X is \$60. b. The price of X is \$40. 4. (4 pts.) Answer the following questions. Please show work and explain your answers. a. Suppose the price elasticity of demand for a laptop is -1.3 and the price of the laptop decreases by 15%, what will be the percentage change in quantity demanded of the laptop? b. Suppose the price elasticity of demand for motorcycles is -0.75 and we observe that the quantity of motorcycles demanded has increased by 25%, what must be the % change in the price of motorcycles that caused this increase in quantity demanded? 5. (4 pts.) The empirical demand function of product X is estimated as: Q ) x = 745.0 – 8.5P - 0.025M + 5.6P R Where, Q ) x is the predicted quantity demanded of X, P is the price of X, M is the average consumer income, and R P is the price of a related product R. a. Assume that the price of X is \$1.65, the average consumer income is \$20,000, and the price of the related good is \$1.75. Compute the predicted quantity demanded of X at these prices and income. b. At the values of P, M, P R given above, what are the price, income, and cross price elasticities of demand? 2
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