Microeconomics besanko braeutigam 4th edition

Therefore, such a good violates the law of demand. The demand for corn depends on the price of corn and the level of disposable income I. An increase in rainfall will increase supply, lowering the equilibrium price and increasing the equilibrium quantity.

A decrease in disposable income will reduce demand, shifting the demand schedule left, reducing both the equilibrium price and quantity. What will happen to the equilibrium price? What will happen to the equilibrium quantity of Maris baseball cards bought and sold? Q b The renewed interest will shift demand to the right, raising the equilibrium price.

Since supply is perfectly inelastic and therefore vertical there will be no change in the quantity supplied; the quantity is fixed.

How much steel will be demanded in ? What is the price elasticity of demand, given market conditions in ? This is the equation for the demand curve for steel in France. When the price of steel is 10, the quantity of steel demanded is thus From equation 2.

Suppose that in , the global market for hard drives for notebook computers consists of a large number of producers. It is relatively easy for new producers to enter the industry, and when the market for notebook hard drives is booming, new producers do, in fact, enter. Therefore, the firm should expect a level of output such that its revenue at a price of.

At the other quantities the revenue would rise. Over that range of prices, her monthly total expenditure on ice cream increases as the price decreases. What does this imply about her price elasticity of demand for ice cream?

What does the sign of this elasticity tell you about whether golf balls and titanium are substitutes or complements? The negative sign indicates that titanium and golf balls are 46 complements, i. The market for taxi cab service is competitive. There is a special lane for taxicabs, so taxis are always able to travel at The demand for trips by taxi cabs depends on the taxi fare P, the average speed of a trip by private automobile on the highway E, and the price of gasoline G.

The number of trips supplied by taxi cabs will depend on the taxi fare and the price of gasoline. How would you expect an increase in the average speed of a trip by private automobile to shift the demand for transportation by taxi cabs?

How would you expect an increase price of gasoline to shift the demand for transportation by taxi cabs? Find equilibrium taxi fare. Show how the equilibrium taxi fare changes as G and E change. On the other hand, when the average speed of a trip by automobile increases, commuters are more likely to use their cars instead of public transportation; the demand for taxi service should shift to the left. On the supply side, a higher price of gasoline increases to cost of providing taxi service; the supply curve for taxi service should shift to the left.

Supply and demand curves are graphed below. Briefly explain your answers. Therefore, the cross price elasticity will be positive. Similarly if the latter becomes expensive, some consumers will not be able to afford it and will switch to the VCR instead. The elasticity will be positive. Since the two usually go together, a sharp increase in the price of one will lead to a c decline in the demand for the other, and the cross-price elasticity will be negative.

Briefly explain your answer. We would expect the cross-price elasticity of demand to be positive. We would expect the cross-price elasticity of demand to be negative. Suppose that the market for air travel between Chicago and Dallas is served by just two airlines, United and American.

What is the price elasticity of demand for United flights between Chicago and Dallas? Hint: Because United and American are the only two airlines serving the Chicago—Dallas market, what is the equation for the total demand for air travel between Chicago and Dallas, assuming that the airlines charge the same price?

Find a linear demand that fits this information, and graph that demand curve. Cigarettes tend to be addictive and so smokers are less likely to be able to reduce their demand in response to short term fluctuations in price.

However if the price remains high for a long time they will consider giving up the habit as it becomes too expensive. This surge in demand ended in March , and the price of notebook hard drives fell back to its level just before the temporary demand surge occurred.

Later that year, in August , a permanent increase in the demand for notebook computers occurs, increasing the monthly demand for hard drives by 25 percent per month at any possible price.

In both circumstances, the market experienced a shift in demand of exactly the same magnitude. Yet, the change in the equilibrium price appears to have been different. When demand surges temporarily, putting upward pressure on price, the quantity supplied expands along the short-run supply curve SS, as shown in the figure below. If demand increases by the identical rate, but the increase is permanent, the industry would expand along the long-run supply curve LS.

The long-run supply curve is likely to be more price elastic than the short-run supply curve. If the demand increase and the resulting upward pressure on price is temporary, producers may be able to do very little to increase supply except to utilize their existing production facilities more intensively perhaps by hiring some temporary labor.

If the demand increase is permanent, industry supply can increase in response to upward pressure on price in a number of ways: existing firms can produce more output in their existing facilities; existing firms can expand their plants; and new firms can enter the industry and produce. At that price people eat dinners at the restaurant every evening. Information about elasticity of demand lets us determine exactly one of those. More formally, we need second equation to solve for both parameters of the linear demand curve.

In each of the following pairs of goods, identify the one which you would expect to have a greater price elasticity of demand. Therefore we would expect the demand for butter to be more elastic.

Your congressman, however, has fixed dates on which to be in Washington and would be prepared to pay more to ensure that he flies on the day of his choosing. Therefore, demand for vacation trips is likely to be more elastic i. Thus, expect the demand for Tropicana to be more elastic than the demand for generic orange juice.

In a city, the price for a trip on local mass transit such as the subway or city buses has been 10 pesos for a number of years. What does this tell you about the sensitivity of demand to price for this good?

Discuss why this is the case. Thus, the slope of the long run demand is —0. Thus, long run demand is flatter. Second, consider the graph below: P Again, long run demand is flatter and thus more sensitive to changes in price. Although this will reduce quantity demanded in the short run by a little, it would reduce quantity demanded all the way to zero in the long run.

Consider the following sequence of events in the U. A series of floods in the Midwest, however, destroyed significant portions of the strawberry fields in Iowa, Illinois, and Missouri. Find linear demand and supply curves that are consistent with this information.

The scare in would shift demand to the left, identifying a second point on the supply curve. The shift in supply will identify a second point along the demand curve. Because the scare of is over, assume that demand has returned to its state. The price P is a price per mile, while quantity is the total length of cab rides over a month in thousands of miles.

Illustrate the equilibrium prices and quantities on the graph. All those changes are illustrated on the graph below. In one country, pomegranates are a critical part of the diet and are central to eh preparation of many popular food recipes.

For most of these dishes, there is no feasible substitute for pomegranates. In the second country, households will purchase pomegranates if the price is right, but they are not considered by consumers to be particularly special or unique, and few popular dishes rely on pomegranates in their recipes.

Suppose pomegranates are native to both countries. Suppose, further, that due to inherent limitations of shipping options, there is no inter-country trade in pomegranates. Finally, suppose that in both countries, droughts and other weather-related shocks periodically cause unexpected changes in supply conditions.

The graph below shows the time paths of pomegranate prices over a year period in each country the blue solid line is the time path in one country; the red dashed line is the time path in the other country.

Based on the information provided, which is the time path for each country? At the optimum the consumer chooses 5 units of clothing and 12 units of food. Determine the optimum consumption basket. This question cannot be solved using the usual tangency condition. If the consumer were at some other point, he could always move to such a point, keeping utility constant and decreasing his expenditure.

The usual budget constraint must hold of course. Her indifference curves are bowed in toward the origin and do not intersect the axes. She is spending all her income at the basket she is currently consuming, and her marginal rate of substitution of hamburgers for milkshakes is 2. Is she at an optimum? If so, show why. If not, should she buy fewer hamburgers and more milkshakes, or the reverse?

So Jane can increase her total utility by reallocating her spending to purchase fewer hamburgers and more milkshakes. He currently consumes 20 bottles of root beer per week, and his marginal utility of root beer is 6. Currently, he also consumes 15 hamburgers per week, and his marginal utility of a hamburger is 8. Is Ray maximizing utility at his current consumption basket?

If not, should he buy more hamburgers each week, or fewer? We have all the information to make this comparison except for the price of a hamburger. At his current consumption basket, his marginal utility for hot dogs is 5 and his marginal utility for sodas is 3. If not, how should he reallocate his spending in order to increase his utility?

To determine if this situation is optimal, determine if the tangency condition holds. That is, is. Combining this with the budget which implies a negative number of CDs.

Thus, even at the corner point, the marginal utility per dollar spent on CDs is lower than on sandwiches. Thus, Helen would prefer to buy more sandwiches and less CDs, which is of course entirely feasible at this corner point. There are several ways to see this. One way is to sketch a few more indifference curves each corresponding to a different level of utility.

This picture strongly suggests that the point of maximum utility occurs at point R. Another way is to compare the marginal utility per dollar of spent on hamburger and the marginal utility per dollar spent on steak at point R. However, at point R, no further reduction in the quantity of steak is possible, and thus R is the optimal consumption basket.

Strangetaste buys only french fries F and hot dogs H out of his income. The price of hot dogs is PH, and the price of french fries is PF. Using the indifference curves you have drawn, indicate on your graph where the optimal basket is located. This point is not an optimum because, for example, Dr. Strangetaste could move to point B on his budget line and achieve a higher level of total utility. Point B, though, is not an optimum either because Dr.

Strangetaste could move to point C, a corner point, to achieve an even higher level of total utility. Her income is Initially, the price of food is 2 and the price of clothing is 2. Suppose, under the initial budget constraint, her optimal choice is 10 units of food and 2 units of clothing. Thus, her initial basket lies inside her new budget constraint assuming her income stays at Fortunately, Pulmonian Airways provides air service and has a frequent-flyer program.

Hint: This problem demonstrates that a budget line need not always be a straight line. Now draw a set of indifference curves that illustrates why Toni might not be better off with the frequent-flyer program. Southeast of the kink, the slope will be — At this point, her indifference curve is tangent to a portion of the budget line where the frequent flyer program does not apply less than 10 round trips. Other 10, A 5, Round Trips 10 20 35 4.

Label the curve U1. Does the indifference curve intersect either axis? How many milkshakes and hamburgers will he buy each week if he maximizes utility? Illustrate your answer on a graph. At the optimum the consumer will choose 4 hamburgers and 16 milkshakes. This can be seen in the graph above.

The price of x is 2, the price of y is py, and his income is When he maximizes utility subject to his budget constraint, he purchases 5 units of y. What must be the price of y and the amount of x consumed? When Justin maximizes utility, his optimal consumption basket will be on the budget constraint and satisfy the tangency condition.

The student now purchases 20 six-packs of root beer per month. The effect of the proposal is to rotate the budget line outward the price change and then shift it inward the lump sum tax , for a total movement from BL1 to BL2. Yet the price ratio along BL2 is P — 0. Thus, the proposal will make the student better off. Will Joe be better off or worse off after the price increase and cash transfer than he was before?

What will happen to his gasoline consumption? The effect of the proposal is to rotate the budget line inward the price change and then shift it outward the cash transfer , for a total movement from BL1 to BL2. Yet the price ratio along BL2 is 2. Thus, the proposal will make Joe better off. Though Paul is happy to get this gift, his grandmother did not realize that she could have made him exactly as happy by spending far less than she did.

How much would she have needed to give him in cash to make him just as well off as with the gift certificate?

The new budget constraint is ABD and he can now buy a maximum of pizzas. The current interest rate at which he is free to borrow or lend is 5 percent. Hint: In each case, start by assuming that Jack would simply spend his income in each month without borrowing or lending money. Would doing so be optimal? The consumer purchases C1 units of a composite good in period 1 and C2 units in period 2.

The following is a general fact about consumers making consumption decisions over two time periods: Let A denote the basket at which a consumer spends exactly his income each period the point at the kink of the budget line.

If the MRS lies between these two values, then he will neither borrow nor lend. You can try to prove this if you like. Keep in mind that diminishing MRS plays an important role in the proof. Would Meg borrow, lend, or do neither this month? What if the borrowing rate fell to 8 percent? Therefore Meg will neither borrow nor lend and will simply spend her entire income each month.

At her initial basket she consumes 2 units of housing. The price of the composite good does not change. At her later basket she consumes 1 unit of housing. Using revealed preference analysis without drawing indifference curves , what can you say about how she ranks her initial and later baskets? Consider a hypothetical basket C on BL2 but northeast of A. By transitivity, B must be strictly preferred to A. The price of a food is 2 and the price of other goods 1.

How large would the cash subsidy need to be? Show her optimal basket with the cash subsidy on an optimal choice diagram with F on the horizontal axis and Y on the vertical axis. Illustrate her optimal choice on an optimal choice diagram. You may use the same graph you drew in part b. Since the indifference curves do not intersect either axis, an optimal basket will be interior.

This optimum is depicted as point A in the graph. So the subsidy needed is This optimum is shown as point B in the graph. So the consumer would like to substitute more Y for F, but cannot do so because at basket C she has purchased all the other goods she can given her budget constraint.

When she has budget line BL1, her optimal choice is basket A. If you can infer a ranking, explain how. If you cannot infer a ranking, explain why not. So by transitivity A must be strictly preferred to C. In addition, since B is strictly preferred to C, B will be strictly preferred to everything below BL3, including all the points along BL3 itself since C is weakly preferred to everything on BL3.

Everything to the northeast of B is strictly preferred to B. In addition, since A is strictly preferred to B [see part a ], everything to the northeast of A must also be strictly preferred to B. Notice, however, that there are points on BL1 both northwest and southeast of A about which we cannot infer anything.

If he were to face budget line BL3, what possible set of baskets could he choose in order for his behavior to be consistent with utility maximization? The fact that he chose A over these points implies that A is at least as preferred to E and strictly preferred to the points northwest of E. Since B is at least as preferred as any point on BL2, including F, by transitivity we know that A is strictly preferred to F and all points on BL3 to the southeast of F.

He spends this money making telephone calls home measured in minutes of calls and on other goods. If Plan A is better for him, what is the set of baskets he may purchase if his behavior is consistent with utility maximization?