1. In this example inflation is about (pick one) (a) 42% (b) 26% (c) 0.8% (d) 0.

ID: 1141154 • Letter: 1

Question

1. In this example inflation is about (pick one) (a) 42% (b) 26% (c) 0.8% (d) 0.7%

2a. price elasticity of demand EdQx:Px at point A (i.e., from A to B) =

b. cross-price elasticity of demand EdQy:Px at point A (i.e., from A to B) =

3. Calculate x at B =

4. For a consumer if price(s) increases, then

a. income subsidy is better than price subsidy because utility can be higher with income subsidy than with price subsidy.

b. income subsidy is based on providing the same basket of goods as price subsidy would have provided.

c. income subsidy is cheaper than price subsidy.

d. Both a and b

e. Both b and c

Calcula

Consumer Initial Equilibrium at A PX 5 and Py-10 Price of X increases Px- 10 Rx= 10 62 Uo 50 Ui 45 58 80

In this example inflation is about 42%. So, option (a) is correct.

Explanation: (80×10+55×10)-(80×5+55×10)/(80×5+55×10)=(400/950)×100=42%

2.a

Price elasticity of demand of good X=%change in quantity demanded/%change in price of good X

=-(35/80)/(5/5)= -.44.

2.b

Cross price elasticity of demand= %change in quantity demanded of good Y/% change in price of good X=(-5/55)/(5/5)=.09.

n x = Expenditure at B(assumed)= (45×10)+(50×10)=950

n x is assumed to be expenditure, because no other expression is given in question for n x.

For a consumer income subsidy is always better than a price subsidy because utility can be higher with income subsidy than with price subsidy.

So, correct option is (a).

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