Chapter Five

3. (a) (b) (c) (d)

% change in P = 50.0%; % change in P = +237% ; . % change in P = 97.2%; % change in P = +28.6%; % change in Q = +28.6% Elast. = .57 % change in Q = 15.4% Elast. = .65 % change in Q = +667% Elast. = .69 . % change in Q = 28.6% Elast. = 1.0

5. (a) Disagree. Buyers will spend more. Since demand is inelastic, the percent decline in quantity demanded is less (in absolute value) than the percent increase in price. Thus, total expenditure, P times Q, will rise. (b) Disagree: They will gain revenues. If demand for tress is elastic (1.3), the percent increase in quantity of trees demanded will be greater than the percent decrease in price. Thus, total revenues collected by vendors will rise. P times Q will be larger. (c.) Disagree: If demand has unitary elasticity, then the percent change in quantity and the percent change in price are exactly equal. Thus, total revenues, P times Q, will not change if price rises. The increase due to the higher price will be exactly offset by the decrease in quantity demanded. 10. (a) (b) (c) (d) (e) The elasticity of labor supply: negative and less than 1 in absolute value Income elasticity of demand: greater than 1 in absolute value Price Elasticity of demand: equal to -1 Cross-price elasticity of demand: positive (could be large or small) Elasticity of land supply: infinite

Chapter Six
Movies # PER MONTH TUMU 1 50 2 80 3 100 4 110 5 116 6 121 7 123 Books # PER MONTH TU MU 1 22 22 2 42 20 3 52 10 4 57 5 5 60 3 6 62 2 7 53 1

50 30 20 10 6 5 2

MU/$ 6.25 3.75 2.50 1.25 .75 .63 .25

MU/$ 1.10 1.00 .50 .25 .15 .10 .05

(b) Yes, these figures are consistent with the law of diminishing marginal utility, which states that as the quantity of a good consumed increases, utility also increases, but by less and less for each additional unit. In the tables, the TU figures for both books and movies are increasing, but as more movies or more books are consumed, the MU diminishes. (c) Five movies and two books. To maximize utility, the individual should allocate income toward those goods with the highest marginal utility per dollar. The first four movies have a higher marginal utility per dollar than the first book, so the person begins by seeing four movies for $32. The first book has a higher marginal utility than the fifth movie, so now the person should buy a book, for a total expenditure of $52. Next, the person should buy the second book, for total spending of $72. And finally, the person should see the fifth movie, for total spending of $80.

(d) See the following graph.

(e) If the price of books falls to $10, only the MU $ column for books needs to

be recalculated: Books # PER MONTH TU MU MU/$ 1 22 22 2.20 2 42 20 2.00 3 52 10 1.00 4 57 5 .50 5 60 3 .30 6 62 2 .20 7 63 1 .10 (f) Now using the same logic as in (c), this individual should purchase six movies and three books, for a total expenditure of 6 x $8 = $48 + 3 x $10 = 78. (g) See the following graph. (h) The decrease in the price of books increases the purchasing power of the individuals income. This increase in purchasing poweror income effectwill be used to purchase more of one or both goods, depending on the individuals tastes. In this case, the individual chooses to use his or her increased income to buy more of both goods. (Note: Another answer to (f) is five movies and four books. This choice uses the entire $80, and it results in the same total utility as six movies and three books.)

Chapter Six Appendix

. . . 3. Agree. Since MU x MU y = 5 > Px Py = 900 200 = 450 , then not on maximum

satisfaction.

MU X 5MU Y 5 = = MU X PX 9 9 MU X MU Y PX PY

MU Y MU Y 1 = = MU Y PY 2 2

The MU per dollar spent on X is greater than the MU per dollar spent on Y. She should substitute X for Y to increase utility. In other words, should buy more X and less Y. Moving from A down to the right will increase utility.