Bhavik Mody

September 25, 2015

Intermediate Microeconomics
Homework 1
Professor: Karl Storchmann
TA: Joshua ODonnell
1.Assuming that P=5, calculate the price elasticity of demand for the following demand
functions:
a) Q = 5 - ln(P)
PED = (dQd/dP) * (P/Q)
Q = 5 ln(P)
dQd/dP = -1/P
PED = (-1/P) * (P/5-ln(P))
PED = (-1/5) * (5/5-ln(5))
PED = -1/(5-ln(5))
b) Q = 2000 0.5P3
PED = (dQd/dP) * (P/Q)
Q = 2000 0.5P3
dQd/dP = - 1.5P2
PED = (-1.5P2) * (P/2000-0.5P3)
PED = (-1.5(5)2) * (5/2000-0.5(5)3)
PED = -187.5/1937.5
PED = -3/31
c) Q = (12-P)2
PED = (dQd/dP) * (P/Q)
Q = (12-P)2
dQd/dP = 2(12-P) * (-1)
dQd/dP = -24 + 2P
PED = (-24 + 2P) * (P/(12-P)2)
PED = (-24 + 2(5)) * (5/(12-5)2)
PED = (-14) * (5/49)
PED = -10/7
d) Q = 2/P
PED = (dQd/dP) * (P/Q)
Q = 2/P
dQd/dP = -2/P2
PED = (-2/P2) * (P/(2/P))
PED = (-2/52) * (5/(2/5))
PED = (-2/25) * (50/4)
PED = -1

2. Consider a competitive market for which the quantities demanded and supplied (per year)
at various prices as follows:
3. In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes.
The average retail price (including taxes) was about $5.00 per pack. Statistical studies
have shown that the price elasticity of demand is - 0.4, and the price elasticity of supply
is 0.5.
4. Larry buys five new textbooks during his first year at school at a cost of $80 each. Used
books cost only $50 each. When the bookstore announces that there will be a 10%
increase in the price of new books and a 5% increase in the price of used books, Larrys
father offers him $40 extra.
5. Sophie has a weekly income of $200 that she allocates among two goods: meat and
potatoes.
6. Hans receives utility from consuming F and C as given by the utility functionU(F,
C)=FC. In addition, the price of F is $2 per unit, the price of C is $10 per unit, and Hans
weekly income is $50.
7. Suppose your utility function is given as U(x,y)=5xy. Your income is equal to $1000. One
unit of x costs $8 and one unit of y costs $5.
8. Carl always gets twice as much utility from an extra soccer ticket as he does from an
extra basketball ticket, regardless of how many tickets of either type he has. Draw Carls
income-consumption curve (= income offer curve) and his Engel curve for soccer tickets.
9. Assume a budget constant is given by 20=x+y. For each of the following utility function
calculate the utility maximizing x and y and the resulting level of utility (you can use any
method, but show your work)