1). All-you-can-eat restaurants allow customers to eat as much as they want for
ID: 1220433 • Letter: 1
Question
1). All-you-can-eat restaurants allow customers to eat as much as they want for a fixed price. These types of restaurants must make money or they would not remain in business. How can they earn profits when people can always eat more which would increase the restaurant’s costs as they eat more? What principle are the restaurants relying on? How does this work?
2). Why is elasticity of demand greater for goods that are a large share of a consumer’s budget? Give an example of a product you feel is more elastic and explain why you feel it is a more elastic type of good.
3). The value of cross price elasticity of demand between goods X and Y is -1.65, while the cross price elasticity of demand between goods X and Z is 2.0. Characterize X and Y and X and Z as substitutes or complements. Explain why this is the case.
4). In a local market, the monthly price of Internet access service decreases from $30 to $25, and the total quantity of monthly accounts increases from 100,000 to 200,000.
A. Using the midpoint method for computing, what is the price elasticity of demand?
5). Discuss the substitution and real-income effects of a price decrease.
6). An individual leaves a college faculty, where she was earning $40,000 a year, to begin a new venture. She invests her savings of $10,000, which were earning 10 percent annually. She then spends $20,000 renting office equipment, hires two students at $30,000 a year each, rents office space for $12,000 and has other variable expenses of $40,000. At the end of the year, her revenues are $200,000.
A. What are her accounting profits for the year?
B. What are her economic profits for the year?
(Be sure and show your work for both questions)
7). Suppose a consumer is at an optimum, consuming 6 hamburgers a week at a price of $1.50 each and 10 donuts a week at 50 cents a donut. If the price of a hamburger increases to $2.00, what will the consumer do to arrive at a new equilibrium? Why?
8). Explain the factors of production and give an example for each one.
Explanation / Answer
Answer 1:
We can say that the buffet system also suffers from the problem of adverse selection. The owners cannot tell beforehand who is going to overeat. Thus, they charge an average price from customers. Some might overeat while others do not.
Answer 2:
Since the consumer is spending a significant amount of money to purchase a good having larger share in the consumer's budget, the demand for the good will be elastic. The consumer will do all the research before actual purchase of the good and then will decide whether to purchase the good or not. Thus, the demand for the good becomes elastic. For example, demand for luxury items like cars, refrigerators are elastic as compared to items like salt whose demand is inelastic as consumers spend small amount of money on the necessity items.
Answer 3:
The cross price elasticity of demand between X and Y is negative, thus, both the goods are complementary goods because as the price of one good rises, the demand for the other good falls. X and Z are substitutes because as the price of one good rises, the quantity demanded of other good rises. Thus, cross price elasticity of demand is positive.
Answer 4:
Price elasticity of demand = 200,000 - 1,00,000 / (100,000 + 200,000 ) / 2 / 25 - 30 / ( 25 + 30) / 2
= 1,00,000 / 150,000 * -5 / 27.5 = 0.67 */ - 0.18 =-3.722
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