Define what the income elasticity of demand measures

Assignment Help Managerial Economics

Reference no: EM131405639

Managerial Economics Assignment

Question 1 -

(a) You are taking two courses this semester: Economics and Mathematics. You have two examinations coming up in both classes. The table below shows your grade on each examination for different numbers of hours spent studying for each course:

Hours of Study	Economics	Mathematics
0	70	60
1	77	68
2	82	74
3	85	78

Your goal is to maximise your average grade on the two examinations. Use the benefit cost analysis to decide how much time you would spend studying for each examination if you had three hours in total to prepare for the two examinations. Note: you can only choose to study in increments of one hour. In your analysis, identify the appropriate marginal costs and benefits, and explain how the economic concept of decision making on the margin is used to solve the problem.

(b) When Steven graduated from university and got a job, his income rose from $15,000 to $60,000. His consumption habits also changed drastically. For instant noodles, his consumption falls from 7 packs a week to zero. For movies, his consumption rises from 1 per year to 11 per year.

(i) Calculate his income elasticity of demand for both instant noodles and movies using the midpoint formula.

(ii) Explain how you would classify the two goods, instant noodles and movies, based on the income elasticity of demand.

(iii) Define what the income elasticity of demand measures. If more consumption is generally preferred to less consumption, why do some goods have negative income elasticities?

(iv) If the economy enters a recession, how would this affect the revenues of the seller of instant noodles and the movie theatre operator? Explain.

Question 2 -

(a) You have decided to spend $40 this month on Fish and Bread. The total utility you receive from different quantities of fish and bread are shown in the table below. The prices of fish and bread are both $10 per unit.

Quantity	Total Utility of Fish	Total Utility of Bread
0	0	0
1	200	140
2	360	260
3	500	360
4	620	440

Apply the rational spending rule to determine the combination of Fish and Bread that optimises your total utility. Explain why applying the rational spending rule is a more appropriate decision making tool for optimizing consumption, compared to simply evaluating the total utility of different bundles of goods.

(b) A large pharmaceutical company estimates that the demand function for its medicine is P = 60 - 5Q. It is currently selling the medicine at $40 per unit.

(i) Calculate the price elasticity of demand at this price.

(ii) Do you think it is a good idea for the company to raise its price to earn more revenue? Explain your answer using the relevant elasticity concepts without reference to graphs or equations.

(iii) At what price does the company maximise its revenue? Show your work.

Question 3 -

The following graph shows the cost curves of a perfectly competitive firm.

(a) If the market price is $6, comment on the profit or loss incurred by the firm. Explain whether the firm will operate or shut down in the short run.

(b) If the market price is $3, comment on the profit or loss incurred by the firm. Explain whether the firm will operate or shut down in the short run.

(c) If the market price is $1, comment on the profit or loss incurred by the firm. Explain whether the firm will operate or shut down in the short run.

(d) Consider the three points, A, B, and C marked on the graph. Discuss the characteristics of these three points. Which point represents the long run equilibrium of the firm?

Question 4 -

Consider a monopolist producer who faces a linear demand curve P = 24 - Q, where P is the price the producer charges and Q is the quantity consumers purchase. The producer produces this good at a constant average and marginal cost of $6.

(a) Identify the price and quantity if the monopolist wishes to maximise revenue.

(b) Identify the price and quantity if the monopolist wishes to maximise profits. Support your answer with a diagram.

(c) Suppose the government imposes a tax of T dollars per unit on the producer. By how much will the consumer shoulder the tax burden? By how much will the producer shoulder the tax burden? Explain why, in general, the consumer shoulders part of a tax burden even when the tax is imposed directly on the producer.

Reference no: EM131405639

Questions Cloud

Problem regarding the neoclassical sympathizer : Given your answer to (a), what might a Neoclassical sympathizer recommend be done, if anything? Given your answers to (c) and (d), which of the two makes the most sense to you? Why?

Determining the stabilization policy : If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run, assuming the government does not employ any stabilization policy?

What do you think of tom ballards reaction and why : What barriers to effective communication do you detect in this case? Is anyone "wrong" in this situation? By what other means could Randell have requested the information from Tom Ballard? What do you think of Tom Ballard's reaction? Why?

Summarize the results of your search in a description : Provide citations for sources used to gather your information. List categories of information were you able to obtain about yourself. (You don't need to provide the facts; simply state the type of information. For example, state "address" or "inco..

Define what the income elasticity of demand measures : ECO201e Managerial Economics Assignment. Define what the income elasticity of demand measures. If more consumption is generally preferred to less consumption, why do some goods have negative income elasticities

Describe entrepreneur in terms of motivation and expertise : Describe this Entrepreneur in terms of Motivation, Expertise, Risk Management, Focus and Self-Belief. What could this person do to become even more successful?

Describe the product fit in strong marketing plans : The Strong Marketing Plan table provided in the FTE material each week states that the Product section of the marketing plan should ensure the product attributes fit with the defined need and that the quality and function will deliver customer val..

Briefly describe the company in the case analysis : Briefly describe the company in the case analysis. What is their primary business, who were the officers or key players described in the case study?

Discuss the most appropriate location for a second store : Develop a guerrilla marketing strategy for your small business. Discuss the most appropriate location for a second store (an actual street address). Explain your reasoning.

Reviews

len1405639

2/25/2017 4:59:11 AM

This is a group-based assignment. You should form a group of 3 members from your seminar group. Each group is required to upload a single report to Canvas via your respective seminar group. Please elect a group leader. The responsibility of the group leader is to upload the report on behalf of the group. It is important for each group member to contribute substantially to the final submitted work. All group members are equally responsible for the entire submitted assignment. If you feel that the work distribution is inequitable to either yourself or your group mates, please highlight this to your instructor as soon as possible. Your instructor will then investigate and decide on any action that needs to be taken. It is not necessary for all group members to be awarded the same mark. The marks awarded to what your answers cover depend on the extent to which they cover the key points that correctly and comprehensively address each question. The key points should be supported by evidence drawn from course materials and, wherever relevant, from other credible sources.

Write a Review

Required(*) Message

User Account

All Pages