The demand and supply curves for a good are given by Q^n = 20 - 2P and Q^x = P -

Question

The demand and supply curves for a good are given by Q^n = 20 - 2P and Q^x = P - 1. a. Calculate the equilibrium price and quantity. b. Calculate the price elasticity of demand and supply at the equilibrium price. Is supply elastic at the equilibrium price? Is supply elastic at the equilibrium price? c. Will market price stay at the same level if firms must pay higher prices for their inputs in production? Explain and describe briefly how market price will adjust. Anthony spends his income on fishing lures (L) and guitar picks (G). Lures are priced at $3 while a package of guitar picks cost $1. Assume that Anthony has $30 to spend and his utility function can be represented as: U(LG) = 4L degree G degree. a. Find the optimal consumption level of L and G. Note that MU_L = 3L degree G degree and MU_G = L degree G degree. n. If Anthony better off if both fishing lures and guitar picks cost twice ($6 for lures and $2 for guitar picks) and his income also doubles (income increases

Explanation / Answer

(14)

Budget line: 30 = 3L + G

(a) Consumption is optimal when MUL / MUG = PL / PG = 3 / 1 = 3

MUL = 3 x (G / L)0.25

MUG = (L / G)0.75

MUL / MUG = 3 x (G / L)

3G / L = 3

3G = 3L

G = L

Substituting into budget line,

30 = 3L + G = 3L + L

30 = 4L

L = 30/4 = 7.5

G = L = 7.5

(b)

When PL = 6, PG = 2 and income = 60,

New budget line: 60 = 6L + 2G

30 = 3L + G

Since budget line remains unchanged, there is no change in optimal consumption bundle and so, utility remains unchanged. So Anthony is not better-off.

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