Assignment – 1

Chapter -2

(1.6) Here,

QA = 1.4* P-2

QG = 1.4* P-3.7

The total demand function is,

Q = QA + QG = 1.4* P-2 + 1.4* P-3.7

At price level $1,

Apple store customers demand, QA = 1.4* 1-2

= 1.4

Google play customers demand, QG = 1.4* 1-3.7

= 1.4

Now, the total demand is, Q = QA + QG = 1.4 + 1.4

= 2.8

(3.2) The demand function is Qd = 110-20p

The supply function is Qs = 20 + 10p

In equilibrium price, quantity demanded is equals to quantity supplied.

Qd = Qs

 110-20p = 20 + 10p
 110-20 = 10p + 20p
 90 = 30p
 P = 90/30
 P =3

The equilibrium price is $3.

Now, will put this p = 3 in demand function to find the equilibrium quantity.

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 Qd = 110-20p

 Qd = 110 – 20(3)
 Qd = 110 – 60
 Qd = 50 units.

The equilibrium Quantity is 50 units.

(4.3)

Production of ethanol has increased more than 8.5 times as more corn is used in the ethanol
production. That is why the demand for corn in that market has increased. It will also increase
the price and quantity demanded in that sector. For this, corn suppliers will supply most of the
corns in that ethanol market and less amount of corn in food market. This will shift the supply
curve to leftward from S1 to S2 in the market for corn as food and consumption of corn as food
will decrease from Q1 to Q2.

(5.1)

We know that,

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Elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Here,

The price of cigarettes rises by 21% and the quantity demanded has fallen by 2.65%

Now, Elasticity of demand = -2.65% / 21%

= – 0.126

So, the elasticity of demand for prenatal smokers is – 0.126

(8.1)

(a) In terms of Apples, people can inspect the quality. Apple products prices are less variable.
Therefore, the market of Apples can be understood very well with supply-and-demand model.
So, the predictions using the supply-and-demand model likely to be reliable in terms of Apples.

(b) In case of convenience stores, store owners are concerned about making their products
purchases by the customers. And, customers can buy a product with a higher price if that product
is in the nearby store. So, the predictions using the supply-and-demand model unlikely to be
reliable in terms of convenience stores.

(c) There are only few firms in electronic games market sells a different product. For this reason,
firms might not be a price taker as product has specific demand and can affect the price. Thus,
the predictions using the supply-and-demand model unlikely to be reliable in terms of electronic
games.

(d) Used cars market is a type of market where sellers have more information then buyers
regarding the products. So, here sellers can affect the price. So, the predictions using the supply-
and-demand model unlikely to be reliable in case of Used cars.

Chapter – 3

(2.7)

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U = q1 + Aq1a q2b + q2

du / dq1 = 1+ (A2) (q1a-1) (q2b) = marginal utility of q1

Marginal rate of substitution = Δq1 / Δq2 = Uq1 / Uq2

We know that, Uq1 = 1+ (A2) (q1a-1) (q2b)

Uq2 = du / dq2 = (A2) (q1a) (q2b-1) +1

So, marginal rate of substitution = 1+ (A2) (q1a-1) (q2b) / (A2) (q1a) (q2b-1) +1

(4.4)

We know that,

Marginal utility of good X / price of good X = Marginal utility of good Y / price of good Y

Marginal utility from books = 10

Marginal utility from cookies = 5

Book price = $10

Cookies price = $2

Marginal utility of book / price of book = 10 / 10 = 1

Marginal utility of cookies / price of cookies = 5 / 2 = 2.5

As the ratio of the marginal utility of book to price of book is not equal to the ratio of the
marginal utility of cookies to the price of cookies, we can say that mark is not maximizing his
utility.

Mark should increase the consumption of cookies and should decrease the consumption of
books. By decreasing consumption of books, the marginal utility of book will increase. By
increasing consumption of cookies, the marginal utility of cookies will increase. Through this,
consumption of books and cookies will be balanced.

(4.11)

The equation for budget line is, Y = p1q1 + p2 q2

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Y = $80

The price of chocolate bar, p1 = $1

q1 is the quantity of chocolate candy

The price of a slice of pie, p2 = $2

q2 is the quantity of a slice of pie

Now,

80 = q1 + 2q2 ----------- (1)

If the indifference curve and budget line are tangent, they have the same slope at this point.

Slope of indifference curve = Marginal rate of substitution q1q2

= - Marginal utility of q1 / Marginal utility of q2

Marginal utility of q1 = 0.75 q10.75-1 q20.25

= 0.75 q1-0.25 q20.25

Marginal utility of q2 = 0.25 q10.75 q20.25 – 1

= 0.25 q10.75 q2-0.75

Slope of indifference curve = - (0.75 q1-0.25 q20.25) / (0.25 q10.75 q2-0.75)

= - 0.75 q2 / 0.25 q1

The slope of budget line = - p1 / p2 = - 1/2

For optimal bundle,

Slope of indifference curve = slope of bundle

 - 0.75 q2 / 0.25 q1 = - ½
 1.5 q2 = 0.25 q1
 q2 = 0.25 q1 / 1.5

Now, will put the value of q2 in equation (1),

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 80 = q1 + 2 * (0.25 q1 / 1.5)

 120 = 1.5 q1 + 0.5 q1

 120 = 2 q1
 q1 = 60

Will put the value of q1 in equation (1),

80 = 60 + 2q2

 20 = 2 q2
 q2 = 10

The quantity of chocolate candy in the optimal bundle is 60.

The quantity of a slice of pie in the optimal bundle is 10.

(4.2)

Elise consumes cans of anchovies, q1, and boxes of biscuits, q2. Each of her indifference curves
reflects strictly diminishing marginal rates of substitution. Where q1 = 2 and q2 = 2, her
marginal rate of substitution between cans of anchovies and boxes of biscuits equals -1.

She will prefer the bundle with 2 anchovies and 2 boxes of biscuits if her marginal rate of
substitution, MRS = 1 at this point. At the point where she has 3 anchovies and 1 box of biscuits,
indifference curve will have a slope of less than 1. It would force to trade for one, thus her utility
would fall.