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If price elasticity of demand = -1.5 and price decreases by 15 percent, then

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Homework Set #2 – ECN 212 – Spring 2017 – Dr. Roberts

Homework Set #2 must be submitted online no later than Tuesday, February 7, 2017 at 8:59 p.m.  This hard copy is for your convenience.

1. If price elasticity of demand = -1.5 and price decreases by 15 percent, then

[A] quantity demanded will increase by 22.5 percent. 

[B] total revenue will decrease.

[C] quantity demanded will increase by 15 percent.

[D] demand will increase by 22.5 percent.

[E] quantity demanded will increase by 30 percent.

2. When the price decreases from $6 to $4 and the quantity demanded increases by 2 units, the price elasticity of demand is

[A] -25.

[B] -1.5.

[C] -5.

[D] -2.5.

[E] Cannot be determined from the information given.

3. Cole is about to purchase 4 units of good A and 6 units of good B. The price of both A and B is $2. Cole has only $20 to spend. Assume that the marginal utility of the fourth unit of A is 8 and the marginal utility of the sixth unit of B is 12.   If Cole wants to maximize utility

[A] he should buy more of A and less of B.

[B] from the information given, it is impossible to determine whether or not Cole is maximizing utility.

[C] he should buy less of A and more of B.

[D] he should not buy anything.

[E] he should buy A and B in the quantities indicated.

4.

  1. a
  2. b
  3. c
  4. d
  5. e

Use the Table below to answer the next question.

  INCOME QUANTITY PURCHASED
Automobiles Coffee Tea
$30,000 2 10 5
$45,000 3 8 10

5.  What is the income elasticity of demand for automobiles?

a)  -2.5

b)  2.5

c)  -1.5

d)  1.67

e)  1.

Use the Table below to answer the next question.

  INCOME QUANTITY PURCHASED
Automobiles Coffee Tea
$30,000 2 10 5
$45,000 3 8 10

6.  What is the cross price elasticity between coffee and tea?

a)  –.42

b)  1.07

c)  –.94

d)  -1.87

e)  We don’t have enough information to calculate cross price elasticity.

7. A price elasticity of demand for Good X equal to -.85 implies

[A] if price increases by $1.00, quantity demanded will decrease by .85.

[B] if price decreases by $0.85, quantity demanded will increase by 1. 

[C] a price of $1.00 will result in sales increase of .85 units. 

[D] if price increases by 1%, quantity demanded will decrease by .85%. 

[E] if price increases by 1%, demand will decrease by .85%.

8. Refer to the figure above. The consumer prefers which of the following?

[A] A to B

[B] A to F

[C] C to E

[D] D to B

[E] B to C

9. In the figure above,

[A] The marginal utility from Good Y at point A is greater than the marginal utility of Good Y at point F.

[B] An increase in the price of Good X will cause the budget constraint to move from BC1 to BC2.

[C] Assuming BC1, if the price of X is $3 then at combination F, the MUX is twice the MUY

[D] From the information in the graph, we can construct a demand curve for Good Y

[E] None of the above answers is correct

10.  Jackson has $10, which he plans to allocate among three rides at the amusement park.  Each ride on the Roller Coaster costs $3.00, on the Bumper Cars, $2.00, and on Splatter Mountain, $1.00.   The Table below shows Jackson’s utility schedule for the three rides.  Given Jackson’s budget constraint, what combination of rides will maximize Jackson’s utility?

# OF  RIDES MARGINAL UTILITY FROM BUMPER CARS   MARGINAL UTILITY FROM SPLATTER MOUNTAIN   MARGINAL UTILITY FROM ROLLER COASTER  
1 200 240 150
2 100 150 90
3 60 50 60
4 10 30 30
5 0 20 9
6 -72 10 0
  1. 3 Roller Coasters and 1 Splatter Mountain.
  2. 1 Roller Coaster, 2 Bumper Cars, and 3 Splatter Mountains.
  3. 4 Bumper Car rides and 2 Splatter Mountain rides.
  4. 2 Roller Coaster rides and 2 Bumper Car rides.
  5. 1 Roller Coaster ride, 1 Splatter Mountain ride, and 3 Bumper Cars.

11. Jackson has $10, which he plans to allocate among three rides at the amusement park.  Each ride on the Roller Coaster costs $3.00, on the Bumper Cars, $2.00, and on Splatter Mountain, $1.00.   The Table below shows Jackson’s utility schedule for the three rides. Given Jackson’s budget constraint, what is the maximum utility he can receive from amusement park rides?

# OF  RIDES MARGINAL UTILITY FROM BUMPER CARS   MARGINAL UTILITY FROM SPLATTER MOUNTAIN   MARGINAL UTILITY FROM ROLLER COASTER  
1 200 240 150
2 100 150 90
3 60 50 60
4 10 30 30
5 0 20 9
6 -72 10 0
  1. We don’t have enough information to answer this question.
  2. 300 utils
  3. 890 utils.
  4. 850 utils
  5. 550 utils

12. Jackson plans to allocate his money among three rides at the amusement park.  Each ride on the Roller Coaster costs $3.00, on the Bumper Cars, $2.00, and on Splatter Mountain, $1.00.   The Table below shows Jackson’s utility schedule for the three rides.  Using the Table above, if Jackson has only three dollars to spend what combination of rides will maximize his utility?

# OF  RIDES MARGINAL UTILITY FROM BUMPER CARS   MARGINAL UTILITY FROM SPLATTER MOUNTAIN   MARGINAL UTILITY FROM ROLLER COASTER  
1 200 240 150
2 100 150 90
3 60 50 60
4 10 30 30
5 0 20 9
6 -72 10 0
  1. He will ride Splatter Mountain three times.
  2. He will ride the Bumper Cars once and Splatter Mountain once.  
  3. He will ride the Roller Coaster once.
  4. He is indifferent between a) and b) because they yield the same utility.
  5. He can’t maximize his utility with just $3.00.

13.    The movie theater recognizes that demand for tickets to its matinee movies is relatively inelastic. To increase its revenues it should

          a.   reduce the price of popcorn and raise the price of soda-pop.

          b.   lower the ticket price.

          c.   increase the price of popcorn.

          d.   it can’t increase sales and should simply stop showing the matinees.

          e.   raise the ticket price.

14.    Suppose the original demand for good R is 20 units and the new demand for R is 10 units. For good T, the original price is $8 and the new price is $6. What is the cross-price elasticity of demand between R and T and how are R and T related?

          a.   0.43, compliments

          b.   5, compliments

          c.   -2.33, substitutes

          d.   2.33, substitutes

          e.   -0.43, compliments

Price Quantity Demanded
$600 0
$500 100
$400 200
$300 300
$200 400
$100 500
$0 600

15. Using the table above, when price changes from $400 to $500 the price elasticity of demand is ________, which means demand is _____

A) -0.333, relatively inelastic

B) -0.333, relatively elastic

C) +0.333, relatively inelastic

D) -3, relatively inelastic

E) -3, relatively elastic

Quantity Total Utility from X Total Utility from Y
1 24 85
2 42 130
3 56 160
4 66 185
5 74 200
6 80 210
7 84 215

          16.   Refer to the table above. Given that the price of good X is $2 per unit, the price of good Y is $5 per unit, and that the consumer spends a total of $28 on both goods, what is the total utility associated with the utility-maximizing combination?

a. 280
b. 154
c. 172
d. We don’t have enough information to determine total utility
e. 251
 
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