2010 B Micro FRQ #3

2010 B Micro FRQ #3

Watch me answer it here on youtube

https://youtu.be/4MmPMLCwKSQ

(A) The table below gives the quantity of good X demanded and supplied at various prices.

(i) Is the demand for good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

Elastic Cheat sheet is here.

First way to get this answer - - -

Second way to get this answer - - -     

 Total Revenue = P x Q

Total Revenue Test

Total Revenue at $30 price = Qd (1) x $30 = $30TR

Total Revenue at $20 price = Qd (3) x $20 = $60TR

Price decreased and Total Revenue increased = Relatively Elastic Demand

From the Elasticity Cheat Sheet

(ii) Is the supply of Good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

From the Cheat Sheet:

(iii) If a per-unit tax is imposed on good X, how will the tax be distributed between the buyers and sellers?

If the quantity supplied  does not change  when the price changes we assume that the good is perfectly inelastic. A perfectly inelastic supply implies that the supplier can't change the quantity of the good he produces. If a tax is imposed an a seller with a perfectly inelastic supply curve the seller will pay the total amount of the tax. 

(The one with the most inelasticity pays the burden of the tax) Know this...

(B) Assume that the income elasticity of demand for good Y is a -2. Using a CLG of the market for Good Y, show the effect of a significant increase in income on the equilibrium price of Good Y in the short-run.

You must understand that the YED, income elasticity of demand, when negative means that Good Y is an inferior good. 

From the Elasticity Cheat Sheet here.

From the Demand and Supply Cheat Sheet here

The "Y" in the cheat sheet above stands for Income. 

If Income (Y) increases then the quantity demanded of the good will decrease.

This is a bit confusing and perhaps I should rework the cheat sheet as actual Demand shifts to the left.

Demand decreases due to the rising incomes and Good Y being an Inferior good.

Remember from the Demand and Supply Cheat Sheet.

Inferior Good - (Y) Income increases then Demand (D) decreases

When Income increases the demand for Good Y decreases

2012 Microeconomics Exam FRQ # 2

2012 Microeconomics Exam FRQ # 2

Watch me answer it on Youtube https://youtu.be/pu9aX-eOWYg

(a) The table above shows Theresa's marginal utility from bagels and toy cars.
(i) What is here total utility from purchasing three toy cars?

So simple it's easy to get wrong... overthinking again?

3 toy cars (10+8+6) = 24 utils

Answer - One point is earned for determining the total utility, which is 24. 

(ii) Theresa's weekly income is $11, the price of a bagel is $2 dollars, and the price of a toy car is $1.

What quantity of bagels and toy cars will maximise Theresa's utility if she spends her entire weekly income on bagels and toy cars?

Explain using marginal analysis.

First, you must know the formula..

Then make a chart------

If you get to a place where both purchases have the same utility then you will be indifferent,, either one will do as long as you have cash to spend.

or

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.  

Answer - One point is earned for stating that three bagels and five toy cars will be purchased.

Answer - One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.   

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

(b) Assume that the price of wheat, an input for the price of bagels, increases. Will Theresa's demand for bagels increase, decrease, or remain unchanged. Explain.

Remember, that input prices affect suppliers of a good,, not demanders.. So, Theresa will not change her demand for bagels if the price of wheat increases.

Answer - One point is earned for stating that Theresa’s demand for bagels will not change because the increase in the price of wheat will affect the supply of bagels, not the demand.

(c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are a normal good, inferior good, substitute, or compliments?
  

Answer - One point is earned for stating that bagels are inferior goods.

(d) Suppose the price of toy cars increase by 10%. Theresa buys 5% fewer toy cars and 4% less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks, and indicate if it is positive or negative.

You gotta be *&(6%^# kidding me.

If the Price of Toy Cars is given then we need the Qd of another good and in this situation the Qd we need is for blocks. 

Xed is the comparison between 2 different goods

Toy Cars & Blocks

 Formula - 

% change in   Qd = -.04   (4% less) (Blocks)
% change in Price = .10 (Toy Cars)

Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:

-0.04/0.10 = -0.4