1. Suppose the price for a dozen golf balls changed from $10 to $11 and the quantity demanded changed from 1000 to 900 units. Estimate the price elasticity of golf balls.
2. Suppose bottled water is $1 per bottle. At that price 1000 bottles are sold each day.
After a 1% price increase the demand for water decreases to 980 bottles per day. What is the own-price elasticity for bottled water in this market?
Based on your answer above, bottles of water are best described as what type of good?
3. If an indifference curve has a constant slope of -1 and the indifference curve touches each axis, it is safe to say that the goods are what types of goods?
At each and every point on an indifference curve the slope indicates what?
A consumer’s ability to consume, as indicated by the budget constraint, is best represented by what equation?
4. With two separate graphs, demonstrate the effect of an increase in income on the demand for Good X when considering A) a consumer equilibrium and B) a market equilibrium. Only fully-labeled graphs (axis, line, price, and quantity as appropriate) will receive full credit on an exam.
Consumer Equilibrium Market Equilibrium
5. A good is not inherently normal or inferior and that an understanding of the context of the consumer’s income change is necessary to determine whether a good is normal or inferior for that consumer. With an Engel curve, show how rental housing can be both normal AND inferior. Be certain to label all elements.
7. Match the elasticity coefficient in column 1 with the correct description of the good(s) in column 2.
(Elasticity Coefficient) Column 2
(write the letter of the corresponding coefficient)
________ indicates that good i is unitary elastic
A. E = -1.5
B. E = 0.0 ________ indicates that good i is probably a luxury good
C. E = 0.5
D. E = 1.0 ________ indicates that good i is own price elastic
E. E = 1.5
F. E = 4.0 ________ indicates that good i is an inferior good
________ indicates that good i and good j are unrelated
________ indicates that good i is own price inelastic
8. With lunch approaching you begin thinking about your lunch options and the cost of each. You have budgeted $6.00 for lunch and are considering a mix of three lunch options that you like: carrots, broccoli, and chocolate. Each serving of any of your lunch options costs $1.
Carrots Broccoli Chocolate
8.a. Complete the table above with the marginal utility of each additional serving.
8.b. You always maximize your utility given your budget and preferences. Given the information in the table how many servings of carrots, broccoli, and chocolate will you consume?
Carrots______ Broccoli______ Chocolate_____
8.c. What is the consumer decision making rule that governs your choices to consume in the above amounts? Hint: you may name the rule or show with an appropriate equation that accounts for all three goods.
9. Construct a consumer equilibrium model for blueberries that shows the following:
• income=$40 per day
• blueberries cost $8 per unit
• all other goods cost $4 per unit
• The consumer will not eat any blueberries. Ever. None.
Write the consumer’s budget line equation using the information given above.
What is the slope of the consumer’s budget line?
What is the slope of the consumer’s indifference curve?
Draw the full consumer equilibrium model on the back of this paper.
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