1. Consider the following table showing prices for commodity X having a demand curve

with the equation

P = 12 – Q _D

where P represents the market price and Q _D is the quantity demanded.

1. Use the equation to complete the column for quantity demanded. Some of the table has been completed to start you off.
2. Complete the columns for elasticity and total revenue.
3. Set up a set of axes in the space below and graph this demand curve. Show the ranges of price elasticity along the curve (i.e., show the range in which demand is elastic, inelastic and unit elastic and remember to label the axes).

2. Suppose that the price elasticity of demand for mangos is 5.0. Approximately how

large a price increase will be required to reduce the consumption of mangos by 10

percent? Show your work for full credit .

3. The Wall Street Journal reported that the 1992 raisin crop was about 245, 000 tons. This was a significant increase from the 1991 crop of about 86, 000 tons. Retail prices were quick to show the effects of the larger crop. Prices declined from $3.00 a ton in 1991 to $2.15 a ton in 1992. NOTE: when calculating price elasticity, use the absolute value (i.e. the positive value) of the calculations to answer the following questions:

i. Complete the table below using the information from the paragraph above.

ii. Assuming that demand has not changed and that all raisins grown in any year were sold in that

year, what is the approximate value for the price elasticity of raisins?

1. 3.98
2. 2.91
3. 1.0
4. 0.40
5. 0

iii. If the price were to decline further in 1993 (ceteris paribus), we would expect the price

elasticity to

1. become more elastic because we are moving down the demand curve.
2. become more inelastic because we are moving down the demand curve.
3. remain the same since there is no change other than a reduction in price.
4. increase, but only until we reach unit elasticity.
5. decrease, but only until we reach unit elasticity.

iv. In most cases, farmers dislike falling prices because it means less revenue. However, this article

seems to suggest that the raisin farmers are very happy to see the prices fall. This is because this

raisin market is

1. price inelastic which means that the farmers should stop growing raisins completely and switch to a more profitable crop.
2. price elastic, which means that the farmers should stop growing raisins completely, and switch to a more profitable crop.
3. price inelastic, which means a drop in market prices, will result in an increase in revenue earned by the farmer.
4. price elastic, which means a drop in market prices, will result in an increase in revenue earned by the farmer.
5. unit elastic, which means that the farmer cannot be any better off than he/she is right now.

v. In this example, total revenues earned by the farmer from 1991 to 1992

1. increased by $86,000.
2. decreased by $250,000.
3. increased by $268,750.
4. decreased by $735,000.
5. remained the same.

4. Consider each of the following headlines and indicate:

1. the relevant elasticity concept(s) (e.g., price, income, cross-price, supply) AND
2. the implied numerical measure of elasticity, if possible (e.g. positive, negative, etc.);
   1. "High prices for goose and duck down cause shift to synthetic
      insulation in winter outerwear".
   2. "Airfare hike of 30% in 1999 accompanied by 7% decline in air
      travel on major carriers."
   3. "Higher consumer incomes mean increased sales and profits for

U.S. wineries."

5. Newspaper vending machines are often built so that customers can pay to lift a door and select a paper from a pile of newspapers. Use the concept of marginal utility to explain why newspaper distributors are not concerned about customers taking the whole stack of papers.

6. Explain the difference between an indifference curve and a demand curve. How are they related to

each other? ( Hint: how are the demand and indifference curves derived?)

7. The following tables show a utility schedule for a consumer’s purchases of food and clothing.

Complete the columns labeled Marginal Utility in each of the tables above.

Suppose that this consumer has an income of $20, the price of a pound of food is $3 and the price of a piece of clothing is $2. Also, assume that she attempts to maximize her utility subject to her budget constraint. (This means that she will try to maximize her satisfaction while spending ALL of her income.)

1. Complete the last column in the tables above using these prices.
2. Use the utility-maximizing rule to determine the number of units of food and clothing that this consumer demands under these conditions. SHOW ALL WORK FOR FULL CREDIT.
3. Now suppose the price of food increases to $4 per pound, ceteris paribus. How many units of food and clothing will the consumer demand now?
4. Use the results from (ii) and (iii) above to graph a possible demand curve for food. Note that this is the demand for food, not clothing. Remember to label the axes.
   8. Consider the following: Suppose market basket A is preferred to market basket B, which is
   preferred to market basket C. You are faced with these options:
   A and C can be on the same indifference curve.
   C is preferred to A
   B and C can NOT be on the same indifference curve
   A is preferred to C
   1. Which of the following choices is correct (circle or indicate in bold):
      1. 1 only
      2. 2 only
      3. 3 only
      4. 4 only
      5. 2 and 3 are correct answers
      6. 3 and 4 are correct answers
      7. None of the answers are correct

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Solution: The downloadable solution consists of 11 pages, 1518 words and 4 charts.
Deliverable: Word Document