Recalling that the optimal pricing formula is P = MC/(1 + 1/e), where MC denotes
ID: 1226138 • Letter: R
Question
Recalling that the optimal pricing formula is P = MC/(1 + 1/e), where MC denotes marginal cost and epsilon represents the price elasticity, what price should widget sellers charge if they seek to maximize profits, and if MC = 20? A consumer is subject to the budget constraint shown by the solid line "Budget 1". His initial utility-maximizing consumption bundle is denoted at Point A. Suppose the price of Y decreases, causing the budget constraint to shift to the solid line "Budget 2", and his utility-maximizing consumption bundle is now at Point C. Observationally, all we see if the shift from Point A to Point C. However, this shift can be decomposed into two separate movements. What do economists call the shift from Point A to Point B? What do economists call the shift from Point B to Point C? Based on the picture, what would the cross-price elasticity of demand, were we able to calculate it, reveal about the relationship between goods X and Y?Explanation / Answer
1. SHift from A to B is the substituion effect, the cosnsumer is on the same indifference curve as before, but consuming more of good Y as the price has of Y has decreased.
b. Shift from B to C is is income effect becuase of the decrease in price of good Y, the consumer has more real income to but both of both goods.
c. Based on the cross price elasticity, we cans say that both these goods are complements. This is becuase when the price of Y decreases, consumption of both goods increases.
e. we need the value of e to find the price.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.