!. the following is sometimes given as an example of a Giffen situation. A perso
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Question
!. the following is sometimes given as an example of a Giffen situation. A person with only $100 available must make a 1,000-mile train trip. He prefers first-class travel costs 20 cents per mile and coach costs 5 cents per mile. Then it can be verified that he will travel 333 1/3 miles in first class and 666 2/3 miles in coach. now let the price of coach travel rise to 10 cents per mile. then the traveler cannot afford any first-class miles at all if he is to complete his trip, so the amount of coach travel will rise from 666 2/3 to 1000 even though its price has doubled!
a. Is coach travel an inferior good here? (what would happen if the travel budget were to rise above $100?
b.Under what circumstances will the traveler choose a corner solution with only coach travel? with only first-class travel?
2. a. what is meant by elastic demand and inelastic demand? b. how can elasticy at a point along a linear demand curve be determined by inspection? c. Along a nonlinear demand curve?
3. let the demand curve be P=A -BG, where A and B are positive constants. a. what is the elasticity at G = 0? b .At G=A/B? c. At G=A/B?
4. if the demand curve is PG = 100, what is the price elasticity of demand at G = 10? At G = 50? At G = 100?
5. Gasoline rationing was proposed in 1973 and again in 1979 as a remedy for the energy crisis. if all persons are given identical rations, compare the opportunity sets of a wealthy and a poor consumer for gasoline consumption versus "all other goods." would permitting sale of coupon be a good idea?
6. a. consider the demand curve PG = 100. what happens to the elasticity of demand as price falls? what happens to "importance" (share of the consumer budget spent on G) as price falls? b. Apply the previous questions for the demand curve P2G=100 C.for the demand curve P1/2G = 100 d. what can you infer about the relation between elasticity and "importance"?
7. Tickets to a sports match are available only on a black-market basis. Professor G, calling from out of town, gives purchasing instructions to this secretary: " if the price is $30 each, buy one ticket for me; at $20 each, buy two; if it is $10, buy three." The secretary says:"Prof, there must be something wrong here. YOU're saying you'd be willing to more in total for two tickets than for three!" Is the secretary correct? Explain
8. Problems in Managerial Economics
a. characterize the following demand function for good x,
X = 500Px-2 Pv1/4 I-1
(I.e. is good x regular, normal, and so forth?)
b. suppose the price is 18, what is its marginal revenue when the firm increases its output by (a) 1 unit of x, (b) 5 units of x?
9. suppose the demand curve for a profit maximizing firm is X=2000Px-3 and the cost function of the firm is
c(x) =5+4x.
a. Find the optimal quantity, price and profit of the firm.
b. determine the break-even point (quantity and price) of the firm.
10. Given the following information: nominal interest rate is 8% and inflation rate 2% what is the real interest rate?
Explanation / Answer
A. Even though coach travel price is doubled it still remains an inferior good here. If the budget is increades from $ 100, the traveller will surely try to do some journey in 1st class.
B. As he have limited budget so he will fulfill his demand of travel with inferior good, i.e coach travel here. If his budget get increases his demand to get superior good will also increase and he will do his travelling in first class.
2.a Elasticity of demand is defined as the responsiveness or sensitiveness of demand to a given change in the price of a comodity. In Inelastic demand whatever may be the price change quantity demanded will remain perfectly constant.
b. Moving from the top left of the demand curve (at the intersection with the price axis) to the bottom right (at the intersection with the quantity axis), all five elasticity alternatives exist.
C. The point method measures the elasticity of demand at different points on demand curve.
PED = Percentage change in demand / Percentage change in price.
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