1.

1)Last year’s average temperature (T) = 30

Therefore, Q d =80−4 P+ 4 ( 30 )

Q d =200−4 P

Equilibrium is possible when

Q d =Q s

200−4 P=−80+16 P

280=20 P

P=14

Q=200−4 ( 14 ) =144

Hence, the last year’s equilibrium price and quantity were 14 and 144 respectively.

1.2)This year’s average temperature (T) = 40

Therefore, Q d =80−4 P+ 4 ( 40 )

¿ 240−4 P

Equilibrium is possible when

Q d =Q s

240−4 P=−80+16 P

320=20 P

P=16

Q=240−4 ( 16 )=176
 Hence, this year’s equilibrium price and quantity were 16 and 176 respectively.

1.3) Since the equilibrium price for free market ( P¿ =16) found in (1.2) is above the price ceiling ( P=15
), the government price control is effective.

2.1) The elasticity of demand is the percentage change in the quantity demanded divided by the
percentage change in the price.

Hence,

% change in Quantity = -3%

% change in Price = +4%

The elasticity of demand for corn flakes is therefore

−( % ∆ Q ) −(−3)
E P= = =0.75
(% ∆ P) 4
Hence, the price elasticity of demand is 0.75.

2.2) McDonald’s decides to raise the price of ‘Big Mac Meal’ from 690 yen to 720 yen.
720−690
Hence, % change in Price = ×100=4.35 %
690
As a result of the price rise, the number of ‘Big Mac Meal’ sold decreases from 4,600 sets to 4,100 sets.
4100−4600
Therefore, % change in Quantity = × 100=−10.87 %
4600
So the price elasticity of demand for ‘Big Mac Meal’ is
−( % ∆ Q ) −(−10.87 )
E P= = =2.498( Approximately 2.5)
(% ∆ P) 4.35
Therefore, the price elasticity of demand for ‘Big Mac Meal’ is 2.5.

3.1) The budget constraint is given by the equation

I =P x X + P y Y

50=1 ( X )+ 2(Y ).
3.2) No because the combination of goods (30,20) costs 1(30) + 2(20) = 30 + 40 = $70, which exceeds the
available income.

3.3) The new budget constraint is given by the equation

I =P x X + P y Y

50=1 ( X )+1(Y ).

3.4) Yes because the combination of goods (30,20) costs 1(30) +1(20) = 30 + 20 = $50, which are within
the available income.

3.5) (i) = ↓

(ii) = ↑

(iii) = ↑

(iv) = ↑

(v) = ?

(vi) = ↑

3.6) These two goods are complements.

4.1) The expected income of Job U = 0.2($490,000) + 0.8($10,000) = $106,000
4.2) The expected utility from job U = 0.2√490,000 + 0.8√10,000 = 140 + 80 = 220
4.3) The expected utility from job U = 220
The expected utility from job C = (√40000) = 200
Since utility from U is greater than utility from C, therefore he will choose job U.
5.1) d) The demand curve is downward-sloping.
5.2) c) Spread of beer alternative beverages
5.3) b) D2 is more elastic than D 1 at E.
5.4) b) Increase by 4%
5.5) d) The demand curve of iPhone is inelastic.
5.6) d) Indifference curves are downward-sloping.
5.7) a) A consumer’s utility is maximized when the budget line and indifference curve are tangent.
5.8) d) $500