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National Cheng Kung University Institute of International Management

Managerial Economics Summer 2017


Assignment Week 2 Session 1

Name: Yuli Elvina Student ID: RA6057094

1. After retrieving information about breakfast habits in Taiwan, the researchers have found
the following elasticity table. Comment about the price and cross-price demand elasticity of
breakfast snacks.

Elasticities Demand for DanBing Demand for FanTuan Demand for ZhuaBing
Price of DanBing 0.586 0.409 0.015
Price of FanTuan 0.207 1.199 1.082
Price of ZhuaBing 0.118 0.546 1.105

Which snack would you say it is the favorite breakfast? Which one is the least? Why?
Which products would make a good combo or set to be sold? Why?

2. Using the database provided, compute the income elasticity of demand for Canada in three
periods (1960 1978; 1979 1997; 1997 2016) for the following products.
a. Compute the income growth and consumption growth for every year (> 1960)
b. Compute the income elasticity for every year (> 1960)
c. Compute the income elasticity that represents a period. Use the average income
elasticity of the period. Fill the table.

Income Wheat flour Oatmeal and Pot and Corn flour Rice
Elasticity rolled oats pearl barley and meal
1960 1978

1979 1997

1997 2016

Overall

Sugar Honey Boneless Butter Margarine


refined Pork
1960 1978

1979 1997

1997 2016

Overall

d. Explain the evolution of the income elasticity of each product. Is it normal or inferior?
Was it normal or inferior?
National Cheng Kung University Institute of International Management
Managerial Economics Summer 2017
Assignment Week 2 Session 1

3. Suppose Superman only consume two goods, food (F) and drink (D).
a. What is the relationship between MRS and the marginal utilities of food and drink?
b. Draw utility curves if both goods hold marginal utilities that are positive but
diminishing.
c. Draw utility curves if the MRS is a constant. Is this a relationship of perfect
substitution or perfect compliments? Explain.
d. Draw utility curves if Superman has two drinks for every food unit he consumes. Is
this a relationship of perfect substitution or perfect compliments? Explain.

4. The average consumer requires two goods: Food and Clothes.


a. Draw the budget constraint of the individual (Graph 1). Indicate the budget
constraint function. Do not forget to indicate the intercept with the axis and the
slope of the budget line.
Bundle Food (F) Clothes (C) Total
X-axis Y-axis expenditure
C 0 40 $80
B 20 30 $80
D 40 20 $80
E 60 10 $80
F 80 0 $80

b. Draw the original budget line and show how it will change if the income is I = $160,
and I = $80 (Graph 2). Do not forget to indicate the intercept with the axis and the
slope of the budget lines.
c. Draw the original budget line and show how it will change if the price of food is PF =
$2, and PF = $0.50 (Graph 3). Do not forget to indicate the intercept with the axis and
the slope of the budget lines.
d. Considering the utility function, = 10 0.75 0.25, compute the MRS.
e. Using the original budget line, what is the optimal consumption bundle? Draw the
optimal consumer choice: budget line, indifference curve, optimal choice (Graph 4).