Homework 2
Note, most of this information/problems were already posted online by Mobinul Huq of the university of Saskatchewan.
The problems are from econ 211.3 intermediate Microeconomic theory. Helen appears to have used the exact same problems.
See solutions below.
1. Sally has $100 to buy supplies for her computer. The two items that she needs are
computer ribbons and computer paper. Paper costs $10 for 1000 sheets, and
ribbons cost $5 and must be replaced after 2000 sheets of paper.
a. Sketch Sally's budget line.
b. What will her indifference curves look like?
c. What is Sally’s best affordable bundle?
2. Jenny’s situation is given by the graph below. Get your answers to parts a.-c. from
the graph. Assume that the price of composite good is $1 per unit.
a. What is the equation for the demand curve represented on the graph?
b. what is the price elasticity of demand at price 4?
c. if a second person had a demand curve identical to Jenny's and they both made up the total market, what would be the market demand function?
Answer (IF I REMEMBER CORRECTLY...):
First find the coordinates of this graph and plot a line to it. The points are P1 = (4, p1) P2 = (6, p2) P3 = (8, p3)
This gives you the demand curve.
Use that curve to get the price elasticity of demand.
SUGGESTION: go to Helen's office hours... most of the class got this problem wrong. I think the only students who got this right went to her office hours.
see the other side for problem 3!!!
3. The following graph presents the effects of a price change from $2 to $1 per unit of X. Y represents the composite good with Py=$1 per unit.
ANSWERS
1.
a. The budget line is a straight line from 100/10 = 10 units of paper to 100/5 = 20
units of ribbon.
b. They will be L-shaped; 2000 sheets of paper complement one ribbon.
c. 4 ribbons and 8000 sheets of paper
2.
a. P = 5 - .5Q The coordinates from the graph are (P=1,Q=8) (P=2,Q=6)
(P=3,Q=4)
b. Elasticity= (P/Q) (inverse of the slope) = (4/2) (-1/.5) = 2 (– 2) = – 4
c. P = 5 - .25Q since the equation P = 5 - .5Q is solved for Q which is Q = 10 - 2P.
Doubling this results in Q = 20 - 4P. In the form of a demand equation we now
have P = 5 - .25Q.
3.
a. Total effect=45-20=25
b. Income effect=45-40=5
c. Substitution effect=40-20=20
d. Good X is a normal good because as income increases, quantity of good X
increases. See graph below.
